* Banks in weaker economies can't use mortgage-backed debt
* Dutch mortgages and U.S. mortgages penalised in changes
* Uncertainty over which assets can be used in cash buffer
* Changes give national regulators significant discretion
By Laura Noonan
LONDON, Jan 11 Southern European banks will find
it harder to benefit from an easing of liquidity rules than
lenders in more creditworthy countries, increasing the risk they
fall further behind peers to the detriment of their local
Sunday's decision by the Basel Committee of global
regulators to give banks more time and flexibility to build up
cash reserves against any future credit crunch was hailed as a
boon for banks, who'd been lobbying hard against harsher rules
that could hurt their businesses and constrain lending.
But the finer detail paints a less jubilant picture as banks
in weaker countries, which need relief the most, will not be
able to take advantage of some of the concessions and all banks
still face considerable uncertainty over much they will benefit.
Under the new rules, banks can now use "high quality"
residential mortgage-backed securities (RMBS), as part of a
stock of easy-to-sell assets designed to see them through a
30-day credit crunch.
However, the securities need to have a high investment grade
credit rating, ruling out banks in countries such as Italy,
Spain, Greece and Ireland, which have seen their sovereign
ratings shredded due to the financial crisis.
"RMBS (changes) only help a few banks," said Delphine Lee, a
Paris-based analyst for JP Morgan. "I don't think we're going
to see issuance doubling."
For example, credit rating agency Moody's said in September
Irish loans turned into an RMBS would get a rating of less than
A3 - below the minimum AA demanded by the new liquidly rules -
because RMBS ratings are capped by the rating of the sovereign.
"Germany and the UK and other European banks may benefit,"
said one senior capital markets source in an Irish bank. "But
banks in the peripheries are in the most disadvantaged position.
Unless you can get it above AA there's not going to be demand."
Euro zone countries that don't have ratings above AA from
any of the major rating agencies include Ireland, Spain, Italy,
Greece, Cyprus, Estonia, Slovenia, Slovakia and Malta.
Some banks elsewhere are also at a disadvantage. For
example, lenders in the Netherlands, with its top-notch credit
rating, are penalised because many Dutch mortgages are issued
with an initial loan to value of 120 percent compared with the
ratio of less than 80 percent demanded by the new regulations.
The rules also exclude most U.S. residential mortgage backed
securities because they are largely backed by non-recourse
loans, which allow a defaulting borrower to hand over the keys
of their property and walk away.
Such an exclusion jeopardises a future revival in the market
for U.S. mortgage bonds, which was a major source of funding
before it flirted with collapse in the aftermath of the U.S.
subprime lending and property crashes.
The new rules have implications for bank lending, since they
cut lenders' reliance on government debt by allowing them to use
mid-grade corporate bonds and blue chip stocks as well as
highly-rated mortgage bonds, for 15 percent of their cash safety
net, dubbed a "liquidity buffer".
Some banks had been hoarding sovereign debt to meet the
liquidity rule and the changes should free them to lend more.
"Sometimes there weren't enough government bonds to go
around," said Bridge Gandy, co-head of the EMEA Financial
Institutions at ratings agency Fitch.
"In countries like Denmark and Norway, which aren't issuing
that much, if banks didn't want to take on currency risk they
would have been too restricted, and had to shrink their balance
sheets" to meet the liquidity rules, which considered government
bonds, cash and ultra high-grade corporate bonds as the only
However, while the Basel Committee has broadened the mix of
assets which can be used, there is still uncertainty because
national regulators will have a significant say.
"An important detail in the full paper is that there has to
be proven liquidity in these securities," said Gandy.
"It depends on how the regulators interpret liquidity. It
can be chicken and egg, when you increase demand, you create
liquidity in the market, but you can't recognise the asset until
you prove liquidity.
"That could stall things for a while."
Several major European banks contacted by Reuters declined
to comment on how they will respond to the changes.
Several banks said they did not have immediate plans to sell
off government bonds, or change their funding mix, pointing out
that the new rules weren't set to kick in until 2015.
The concessions could make it easier for banks to hand back
some of the trillion euros ($1.3 trillion) in three year money
they've taken from the European Central Bank, money which they
have an opportunity to repay on Jan. 30 and Feb. 26.
"It's way too early to say what the literal impact will be,"
said one banking source of the concessions. "Some technical
details are still not fixed so we cannot quantify anything."
He added that even though the Basel Committee had decided
certain securities counted as high quality liquidity, this did
not mean that his bank would agree. "We have an internal
standard for liquidity reserves that's much tighter."
"Just because the LCR (liquidity coverage ratio) is eased,
it doesn't mean that our standard will be."