Global Regulators Give In To Banks Over Risk Rule

In a move that observers suggest is the latest instance of regulators diluting their landmark 2010 response to the global financial crisis, global banking regulators have eased a key element of their plan once designed to create a safer financial system.

The rule was initially designed to ensure that big banks could survive a future financial crisis without running short of cash.

Following heavy industry pressure, the Basel Committee has now made it easier for banks to meet the rule, known as the "liquidity coverage ratio." They have also given banks four more years to meet capital requirements, delaying its full implementation until 2019.

The banking industry argued that the original rule, which required banks to come up with trillions of dollars of liquidity, would lead them to dramatically cut back lending. Banks also wanted a broader array of assets to count as “high-quality liquid assets.”

The rule drafted in 2010 pointed largely to government bonds and cash parked at central banks. The banking industry argued that a more diverse array should be included, from blue-chip stocks to mortgage-backed bonds to stashes of gold. Ultimately, regulators agreed to let banks use some of these assets to satisfy up to 15% of their requirements under the rule.

Observers are now are raising doubts as to whether the package created after the 2008 financial crisis and designed to protect the global financial system in the face of any future crises, will ultimately be implemented at all, the Wall Street Journal argues.

From the WSJ:

Nobody knows for sure whether the rules will strike the right balance between preventing banks from becoming dangerously fragile and providing the industry the flexibility needed to finance economies around the world. Previous iterations of the Basel rules failed to prevent banking crises, partly because they didn't anticipate the then-obscure corners of the financial system that would cause future problems.

Regulators argue that the new regulations, while weaker than originally envisioned, nonetheless make banking rules much stronger than they were before the crisis.

Meanwhile, regulators have also changed their view of the severity of the crises banks might face and should be able to withstand.

The original rule stated that banks should assume that in a 30-day crisis, they would see 5% of their retail deposits vanish. The banking industry argued that this was unrealistically harsh, the WSJ points out. The new rule lowers the level to 3%.

Certainly, while financial institutions are happy about the change to the rules, observers are wary about seeing a rule relaxed so soon after the 2008 global crisis caused mayhem to the global financial system.

Memories fade fast, as UK paper the Guardian notes. Five years ago the UK witnessed the first run on a bank – Northern Rock – since 1866 . The London paper also recalls the panic that set in a year later when Lehman Brothers collapsed.

In 2010 Lord Turner, chairman of the Financial Services Authority, was calling for "tighter capital and liquidity controls on all banks", the Guardian points out.

But now, banks have another four years to build up enough cash to survive a 30-day credit crisis.

“The banks could hardly contain their glee, describing the announcement from the Bank for International Settlements committee of banking supervisors as a 'twelfth night present',” the Guardian notes.

“Little wonder that the impression is that the banks have once again outwitted their regulators,” the paper added.

Melanie Rodier has worked as a print and broadcast journalist for over 10 years, covering business and finance, general news, and film trade news. Prior to joining Wall Street & Technology in April 2007, Melanie lived in Paris, where she worked for the International Herald ... View Full Bio