May 16, 2021

Bank Regulators to Allow Leeway on Capital Rule

The oversight panel of the Basel Committee on Banking Supervision, an international organization of financial regulators, met on Sunday and issued a statement saying that while more capital was always better, that did not mean banks would never be allowed to dip below required levels.

“During a period of stress, banks would be expected to use their pool of liquid assets, thereby temporarily falling below the minimum requirement,” the statement said. Among the main topics of the meeting were proposals on the so-called liquidity coverage ratio, which is intended to ensure that financial institutions have enough liquid assets to ride out a crisis.

In 2008, at the peak of the country’s most recent financial crisis, banks ran short of capital and the government stepped in to lend them billions of dollars of taxpayer money. Lehman Brothers, which failed in September 2008, ran short of capital, prompting it to file for bankruptcy, the largest such filing in United States history.

The panel said it would issue more detail on its statement to clarify the liquidity coverage ratio, or L.C.R., rules “to state explicitly that liquid assets accumulated in normal times are intended to be used in times of stress.”

It continued: “It will also provide additional guidance on the circumstances that would justify the use of the pool. The Basel Committee will also examine how central banks interact with banks during periods of stress, with a view to ensuring that the workings of the L.C.R. do not hinder or conflict with central bank policies.”

While the statement may not have been surprising — regulators have pushed for banks to hoard capital so they have enough in times of stress — it will still interest Wall Street executives.

The decision by regulators to require banks, including those in the United States, to raise capital levels has eaten into profits. The money banks must set aside cannot be deployed elsewhere, potentially for higher rewards. This is one reason banks have been less profitable since the financial crisis.

While banks have already been working to increase capital levels, a number of the Basel requirements do not take effect until 2015.

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