* Basel Committee to discuss liquidity on Sunday
* Regulators set to relax timing on liquidity ratio-source
* Threat of credit crunch prompts rethink
* Banks would have had 1.8 trillion euro funding shortfall
By Steve Slater and Huw Jones
LONDON, Jan 4 Europe's credit-starved economies
look set to be the main beneficiaries of plans to relax new
rules and give lenders more time to build up their cash buffers.
The Basel Committee of global regulators will on Sunday give
banks longer to comply with stricter new rules on the amount of
liquid assets they hold, a regulatory source said on Thursday.
Further tweaks could also be seen.
Banks have been fighting hard to delay implementation and
alter parts of the liquidity coverage ratio (LCR) rules -
governing the level of easily tradeable assets such as
government bonds they need to hold to ensure their stability if
markets freeze up.
Some top regulators have also warned the original rules, due
to come into force by 2015, will cut lending just when they are
trying to encourage the flow of money to help kick-start
"The banks have made quite marked progress in addressing the
issue of liquidity since the crisis. Basel now seems to be
worried about the danger of a knock-on impact on the wider
economy," said Chris Wheeler, analyst at Mediobanca in London.
"Banks are still deleveraging ... so they (regulators) seem
keen to provide a little bit of leeway, on the basis that
progress has been made, and they don't need to force it,"
A senior executive at a top European bank last year told
Reuters the LCR needed to be eased significantly as it was too
prescriptive and could spark another huge wave of deleveraging,
or banks cutting their loan books.
The liquidity rules will run alongside tougher capital rules
- covering the amount banks have to hold to absorb losses -
which have already forced banks such as Royal Bank of Scotland
, Lloyds, Citi, BNP Paribas and
Societe Generale to aggressively shrink their balance
That has been achieved largely by shedding capital-markets
assets, including derivatives on toxic sub-prime mortgages, or
overseas loans, but a second wave of deleveraging was likely to
land closer to home and hit domestic lending, the top bank
The Basel Committee, made up of supervisors from nearly 30
countries, will discuss the liquidity issue at a meeting on
Sunday. Regulators have for some time been expected to approve
easing some parts, although they remain keen to be seen to be
taking a hard line on banks.
The aim is to better protect taxpayers from having to bail
out banks and avoid a repeat of the 2007-09 financial crisis. A
liquidity rule could have prevented the short-term funding
freeze that brought down lenders like Britain's Northern Rock.
Investors, too, are keen to see banks meet new rules early.
That will help Basel relax the rules on timing, analysts said,
as banks are aware they could be punished by investors if they
lag behind rivals in meeting new standards.
Most regulatory focus has been on strengthening capital and
higher capital rules being phased in from this month are due to
be fully implemented by 2019.
Yet the LCR is another key plank of Basel III, aiming to
ensure banks have a stable funding structure and hold enough
easy-to-sell assets to survive a 30-day credit squeeze in times
The implications are huge.
If the LCR had been in force at the end of 2011, the world's
biggest banks would have needed 1.8 trillion euros more
liquidity, or about 3 percent of their assets, the Basel
Committee has estimated.
Most of the shortfall is in Europe, where banks would have
needed about 1.2 trillion euros, or 3.7 percent of their assets,
Europe's banking regulator estimated. Banks in France and Spain
are among those most at risk of falling short, some analysts
In addition to wanting more time, banks say more assets
should be eligible and deemed highly liquid, possibly including
"A phasing in of the LCR would enable banks to better
finance growth as the economy recovers, rather than stashing
assets away in government bonds," said Simon Hills, director at
the British Bankers' Association.
"And including retail mortgage-backed securities in the LCR
buffer would stimulate the securitisation market, enabling banks
to shift good-quality mortgages off their balance sheet (and)
freeing up capacity for the new loans to SMEs (or small and
medium-sized firms) that they want to make," Hills added.
Banks that have a shortfall need to scale back their lending
or business activities that are most vulnerable to a short-term
liquidity shock, or lengthen the term of their funding beyond 30
days, or opt to hold more liquid assets.
Yet the measures themselves are not risk free.
Industry sources say potential unintended consequences of
the rules include an even greater emphasis on holding government
bonds, which the euro zone crisis has shown carry their own
risks; banks chasing a limited pool of retail deposits; and a
possibility that more disclosure on liquid assets creates scope
that short-term changes will panic investors.
Banks do not typically release LCR data. The Basel
Committee's last assessment said at the end of 2011 the average
ratio across the 102 biggest global banks was 91 percent and
across the next 107 banks 98 percent - short of the required 100
Some 38 percent of the banks in the sample would have had a
ratio of below 75 percent, signaling they would need to take