ECONOMY

Basel rules change may affect government bonds

Regulators may diminish the central role of government bonds in planned banking rules designed to make the financial system safer.

The Basel Committee on Banking Supervision, which coordinates regulations for 27 countries, may let banks use equities and more corporate debt, in addition to cash and sovereign bonds, to satisfy new short-term liquidity standards, said two people with direct knowledge of the plans who requested anonymity because the talks are private. The move could reduce demand for European government securities, making it harder for nations on the brink of insolvency to fund themselves.

?One of the central pillars of the Basel III framework is the notion of a risk-free asset class,? said Matthew Czepliewicz, a banking analyst at Collins Stewart Hawkpoint Plc in London. ?That central pillar is disintegrating. Basel is quite clearly going to have to be revised.?

Since rules on liquidity and capital known as Basel III were approved in 2010, holders of Greek debt have agreed to a 50 percent writedown, while prices of Italian, Spanish and Portuguese bonds have fallen as yields hit euro-era highs. Regulators now face a balancing act between acknowledging investors? loss of confidence in sovereign debt, which has contributed to a 30 percent decline in bank shares (BEBANKS) this year, and the need to avoid undermining governments? credibility.

Limiting the role of government bonds in the Basel rules is logical, said Bob Penn, financial-regulation partner at Allen