December 16, 2019

Banks Win an Easing of Asset Rules

The rules are meant to make sure banks have enough liquid assets on hand to survive the kind of market chaos that followed the collapse of Lehman Brothers in 2008. Meeting in Basel, Switzerland, the committee, made up of bank regulators from 26 countries, also loosened the definition of liquid assets.

The decision marks the first time regulators have publicly backed away from the strict rules imposed by the Basel Committee in 2010. The easing takes some pressure off banks, which have complained that the new guidelines would throttle lending and hurt economic growth.

Mervyn A. King, governor of the Bank of England and chairman of the group, said there was no intent to go easier on lenders. “Nobody set out to make it stronger or weaker,” he said of the rules in a conference call with reporters, “but to make it more realistic.”

Still, the decision was a public concession from the authors of the so-called Basel III rules that the regulations could hurt growth if applied too rigorously. It was endorsed unanimously by participants, including Ben S. Bernanke, chairman of the Federal Reserve, and Mario Draghi, president of the European Central Bank.

The rules were drafted by the Basel Committee on Banking Supervision, named after the Swiss city where many of the discussions have taken place. The Basel rules are not binding on individual countries, but there is substantial international pressure for countries to comply.

Much of the debate so far has focused on increasing the amount of capital that banks hold in reserve to absorb losses. After Lehman’s collapse, trust among financial institutions evaporated and banks refused to lend to one another. Many banks discovered that they did not have enough cash or readily salable assets to meet short-term obligations. In some cases, banks that were otherwise solvent faced collapse.

The rules require banks to have enough cash or liquid assets on hand to survive a 30-day crisis, like a run on deposits or a credit rating downgrade. They will not take full effect on Jan. 1, 2015, as originally planned, but will be phased in more gradually and not take full effect until Jan. 1, 2019.

This so-called liquidity coverage ratio also defines what qualifies as liquid assets: the assets cannot be already pledged as collateral, for example, and they must be under the control of a bank’s central treasury, so it can act quickly to raise cash if needed.

On Sunday the central bankers and regulators broadened the definition of liquid assets. For example, banks will be allowed to use securities backed by mortgages to meet a portion of the requirement.

A large majority of big banks already meet the requirements, but some do not, Mr. King said. The decision reduces pressure on those banks to hold more cash or buy high-quality government bonds to meet the rules on liquid assets.

The panel said it was continuing to discuss another set of regulations aimed at preventing banks from becoming overly dependent on short-term funds. But it did not announce any new decisions Sunday.

Before the Lehman bankruptcy, some institutions made long-term loans using money borrowed for very short periods. The practice is a normal part of banking, but it can, if carried to extremes, make a bank vulnerable to market disruptions.

Depfa, an Irish bank owned by Hypo Real Estate of Germany, issued long-term loans to governments using money it borrowed in short-term money markets. The bank made a profit from the difference between what it could charge for the long-term loans and what it paid to borrow short term. But after Lehman collapsed, Depfa was no longer able to roll over its obligations by borrowing on international money markets. Its parent company required a taxpayer bailout to survive.

The new rules seek to ensure that banks have a variety of fund sources and are not overly dependent on one market or lender.

Although the Basel Committee drafts global banking rules, it is up to individual countries to write them into law. The United States has lagged countries including China, India and Saudi Arabia in putting the rules into force, according to an assessment by the Basel Committee in September. The American delay has led to some grumbling from other members.

Bank industry representatives have argued that stricter capital and liquidity requirements increase banks’ financing costs, which they must pass on to customers. One of the most vocal critics of the new regulations is the Institute of International Finance in Washington, whose members include many large American and European banks, including Goldman Sachs, Morgan Stanley and Deutsche Bank.

In October, the institute issued a report arguing that the rules would make banks less willing to issue longer-term loans or hold debt issued by smaller companies, whose bonds usually have lower credit ratings. The rules would also penalize banks in emerging countries, the institute said, because they have less access to low-risk assets.

Proponents of the new rules argue that banks will be able to raise money more cheaply if they are perceived as being less vulnerable, thus offsetting the cost of the new rules. They point out that American banks have generally recovered from the crisis more quickly than European banks because United States regulators forced them to raise new capital.

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