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Banks Will Be Allowed to Draw Down Liquidity Levels During Crises
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Banks Will Be Allowed to Draw Down Liquidity Levels During Crises

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Banks Will Be Allowed to Draw Down Liquidity Levels During Crises

Banks will not be required to keep up minimum liquidity levels during financial crises, the Basel Committee on Banking Supervision said on Sunday, thus avoiding cash-flow difficulties.

“During a period of stress, banks would be expected to use their pool of liquid assets, thereby temporarily falling below the minimum requirement,” the Basel Committee’s governing board said in a statement on its website yesterday following a meeting in the Swiss city.

The aim of the measure is to ensure that lenders hold enough liquid assets to survive a 30-day credit squeeze. Known as a liquidity coverage ratio, the measure is one of several from the regulatory group designed to prevent another financial crisis akin to that of 2008. It will go into effect in 2015.

But despite the new allowance, there remains concern that “banks won’t want to draw down their liquidity buffers because of how such a move may be received by the markets,” said Patrick Fell, a director at PricewaterhouseCoopers LLP in London. “A bank that is seen to draw on the buffer could feel itself to be weakened and compromised.”

Before the rule goes into effect, regulators must still clarify which assets banks will be allowed to count toward their liquidity requirements and how much funding lenders should expect to lose in a crisis. The Basel committee will also have to provide further guidance on when lenders will be allowed to breach the minimum rule.

Separately, the banking regulator’s governing board also said that “each Basel Committee member country has committed to undergo a detailed peer review of its implementation of all components of the Basel regulatory framework.” The assessment will determine whether lenders are correctly valuing their assets, among other objectives. The United States, Japan, and the European Union will be the first to undergo the exams, the results of which will be published.

Still, Moody’s Investors Service says forcing lenders to hold more capital won’t be enough on its own to calm concerns that banks will be vulnerable if a European country should default on its debt. “Any sustained improvement in bank creditworthiness will require a resolution” of the region’s fiscal crisis, Moody’s said in its Weekly Credit Outlook today, which would in turn “require credible steps towards much closer fiscal integration and increased mutual support among member states,” Moody’s said.

German Chancellor Angela Merkel and French President Nicolas Sarkozy met today to discuss just that — a so-called fiscal compact that would call for stricter budget rules for participating European states. With the exception of Britain, which says the rules could give London a competitive disadvantage in the global financial sector if not adopted on a global scale, most of Europe is on board for the plan, and could reach an agreement on the fiscal compact by the next EU summit on Thursday.

Basel Committee: Banks Will Be Allowed to Draw Down Liquidity Levels During Crises (NYSE:AXP, NYSE:BAC, NYSE:BBT, NYSE:BCS, NYSE:C, NYSEB, NYSE:GS, NYSE:JPM, NYSE:MS, NYSE:PNC, NYSE:USB, NYSE:WFC, NYSE:XLF, NYSE:KBE) | Wall St. Cheat Sheet

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