Softer liquidity rules lift Europe's banks

Comments (2)
dareconomics wrote:

As the debt super cycle enters its final chapter, the world finds itself awash in debt. This debt pile is composed of public, private and financial sector obligations. In the U.S., households, companies and banks are far along the deleveraging process, but the federal government has increased its borrowing to compensate.

Europe has not really begun deleveraging. There has been very little change in private sector debt, government debt has actually increased and the banks have barely begun the process. A consulting firm claims that European banks have completed two-thirds of its deleveraging needs, but the chart above tells us something different. The truth is that European banks are stuffed to the rafters with questionable loans, which they cannot sell at sums close to their carry value. As such, deleveraging would wipe out their capital cushions.

The proposed capital and liquidity rules would have forced European banks to sell assets to raise cash for capital and liquidity buffers. Capital sales would have forced the banks to further curtail lending to both the private and public sectors. In that case, there would be no buyers left for the distressed sovereign debt of countries like Spain and Portugal, and no one to make loans for increased business activity.

Since the banks could not meet the new standards, the solution to the problem is to water them down. This has been accomplished in two ways. First, there will be a four year delay for the new Liquidity Cover Ratio (LCR) to take effect. Banks must meet 60% of their LCR need by 2015 with 100% funding delayed to 2019. Second, more assets will be deemed “liquid” for purposes of computing the LCR. Up to 15% of a bank’s LCR may be fulfilled by BBB- rated corporates. This change is a farce. During the last financial crisis, the only asset that remained liquid at reasonable market prices was sovereign debt, and this was prior to the eurocrisis.

The reason for the new rules is to create banks that are able to withstand crises. Since many banks could not meet these new standards, they are replaced by weaker ones. While this action will not strengthen the financial system, at least the banks may continue using leverage to keep struggling sovereigns afloat and keep nonperforming loans on their books at face value. The new rules may not fix anything, but they will allow the cover-up to continue.

Full chart with post at

Jan 07, 2013 5:35pm EST  --  Report as abuse
GeorgeLekatis wrote:

1. The LCR will be introduced as planned on 1 January 2015, but the minimum requirement will begin at 60%, rising in equal annual steps of 10 percentage points to reach 100% on 1 January 2019. This graduated approach is designed to ensure that the LCR can be introduced without disruption to the orderly strengthening of banking systems or the ongoing financing of economic activity.

2. During periods of stress it would be entirely appropriate for banks to use their stock of high quality liquid assets (HQLA), thereby falling below the minimum

3. Banks will be able to count a much wider variety of liquid assets towards their buffers, including some equities and high-quality mortgage-backed securities.

4. European and American banking stocks surged because they will incur much reduced costs due to the implementation of the relaxed rules.

5. Banks in many other counties will have no benefit, as supervisors have already asked for strict liquidity rules, and they are not willing to take it back.

6. On the negative side, the main objective of Basel iii is to restore investor confidence. The Basel Committee has developed the new framework as a response to the crisis, and has explained (time and time again, every month since November 2010) the need for these strict rules.

Although it is true that Basel iii is an overreaction to the market crisis, it is way too late now to “ease” the rules and make investors happy the same time. This is simply a red flag for investors, leading to the conclusion that banks could not really comply. I have several telephone calls and shareholders ask the same question: What is wrong with the banks?

I agree with the Liquidity Coverage ratio (LCR) Basel iii amendment, but I cannot agree with the way it was presented.

George Lekatis
Basel iii Compliance Professionals Association (BiiiCPA)

Jan 07, 2013 6:31pm EST  --  Report as abuse
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