* Denmark rebuffed over covered bonds
* All EU government debt treated equally
* Recommendations will form basis for draft EU law
By Huw Jones
LONDON, Dec 20 The European Union's top banks
hold on average bigger cash-like buffers than required though
some specialised lenders should get some leeway, the bloc's
banking watchdog said on Friday.
Banks will have to hold a so-called liquidity buffer made up
of top quality assets akin to cash, such as government bonds,
that can be sold easily so that lenders can withstand short-term
shocks unaided by taxpayers.
The buffer, known as a liquidity coverage ratio or LCR, will
be phased in from 2015 with full compliance by 2019.
The European Banking Authority (EBA) said data provided by
357 banks covering about two-thirds of total EU banking assets
showed an average LCR of 115 percent, or above what is required.
Some banking models make it easier to comply than others.
"The EBA is, therefore, proposing specific derogations for
certain business models under stringent and objective
conditions," the watchdog said in a statement.
Such leeway would be given to some consumer and auto finance
firms who have no deposits to draw on, while no mainstream bank
is expected to get an exemption.
EBA also endorsed the LCR definition agreed at the global
level by the Basel Committee, signalling resistance to calls to
water it down.
Separately, the watchdog also published keenly awaited
recommendations on what should constitute two types of assets
that can be included in the LCR -- "extremely high quality
liquid assets", and "high quality liquid assets".
At least 60 percent of the LCR must come from the first
category, the rest drawn from the second category.
The EBA said the top category includes all bonds guaranteed
by governments and central banks in the EU as well as those from
supranational institutions like the European Investment Bank.
NO DOOM LOOP DIFFERENTIATION
The EU bailed out stressed euro zone countries like Ireland,
Portugal and Greece but the EBA said all EU government debt
would be treated the same terms despite "some differences in the
Differentiation in supervisory treatment would reinforce
fragmentation of the single market and the sovereigns-bank loop,
This refers to policymakers trying to weaken the so-called
"doom loop" between cash-strapped governments and their domestic
banks whose balance sheets are stuffed with their bonds.
EBA said examples of second category of liquid assets
include covered bonds, residential mortgage-backed securities
(RMBS), corporate bonds, shares and local authority bonds.
Exclusion of covered bonds from the top category will
disappoint Denmark which has lobbied hard to get its large
covered bond market fully accepted.
"Despite the excellent liquidity features showed by some
covered bonds, doubts remain as to ... their inclusion in the
category of extremely HQLA," EBA said.
There was not enough data on how covered bonds stood up in
times of extreme distress.
Bankers are likely to be dismayed that only securitised debt
included in the second category is RMBS, having wanted a wider
selection for inclusion.
Securitisation was tarnished in the financial crisis and
bankers are looking for official endorsement in order to help
coax investors back.
The EU's executive European Commission will use the
recommendations to draft a law next year on bank liquidity that
will need approval from the bloc's member states and the
European Parliament, with some changes likely.