ECONOMY

ECB said to urge weaker Basel liquidity rule on crisis concerns

The European Central Bank is pushing global banking regulators to relax a draft liquidity rule so that lenders can use some asset-backed securities and loans to businesses in a buffer they must hold against a possible credit squeeze, according to three people familiar with the talks.

The ECB, backed by the Bank of France, considers a draft version of the liquidity coverage ratio, or LCR, may hamper efforts to combat the euro-area debt crisis by curtailing lending and making it harder for central banks to implement their monetary policies, said the people, who couldn?t be identified because the discussions at the Basel Committee on Banking Supervision are private. They said the ECB stance is opposed by some other Basel members, including U.S. regulators.

The LCR was drawn up by the Basel group as part of a package of measures to prevent a repeat of the turmoil that followed the 2008 collapse of Lehman Brothers Holdings Inc. The ECB is seeking to relax the rule — designed to force banks to hold enough easy-to-sell assets to survive a 30-day credit squeeze — by expanding the range of eligible securities, aligning the standard more closely with its own collateral arrangements, the people said.

?As central banks have relaxed their rules? during the debt crisis in the euro area, ?the LCR has become more and more out of sync with central-bank reality,? said Jesper Berg, senior vice president at Nykredit A/S, Denmark?s biggest mortgage bank.

Collective Shortfall

The 212 largest global banks would have had a collective shortfall of 1.76 trillion euros ($2.2 trillion) as of June 2011 in the assets needed to meet the LCR, according to figures published by the Basel committee. The ratio is scheduled to take effect in 2015.

Lenders have warned that a provisional version of the LCR standard, published in 2010, would force them to cut loans by making them hoard cash and buy up more government bonds, because few assets other than sovereign debt would fully qualify.

The Basel committee said last year that it would review the rule to address any unintended consequences, and is targeting a deal by January 2013, when central bank and regulatory chiefs will meet to discuss the plans. The group will attempt to make headway at a meeting next month.

While a number of regulators favor making some changes to the LCR, the ECB and Bank of France are among those seeking the broadest overhaul, the people said.

Liquidity Buffers

More closely aligning the LCR with the ECB?s collateral rules would expand the range and quality of assets that banks can use to fill up their liquidity buffers, including by giving some scope for asset-backed securities and banks? own loans to businesses to be used.

The ECB is concerned that without an alignment, banks that borrow funds from the central bank will earmark their best quality assets to meet the LCR rule, according to two of the people.

The Frankfurt-based ECB is also concerned that banks? need to hoard highly liquid assets may affect the operation of short-term funding markets, they said.

The ECB presented its LCR plan during discussions in the Basel committee?s working groups, including a meeting in New York this month, according to one of the people. Its arguments received only limited support, the person said.

There are concerns among some Basel members, including in the U.S., that far-reaching changes to the LCR may undermine the effectiveness of the measure, which was drawn up in part to make lenders less reliant on central bank support in crises, the people said. Germany?s Bundesbank is also skeptical of the ECB proposals, one of the people said.

Superior Performance

?The ECB accepts as collateral almost anything short of the CEO?s tie,? said Berg. ?The ECB?s superior performance in the early phase? after the Lehman collapse ?can to a large extent be attributed to its broad collateral framework.?

There is little support in the committee for calls from banks for either gold or equities to count as eligible assets under the LCR, the people said, with neither likely to make it into the final version of the standard. In general, euro-area regulators are among the more sympathetic to the case for including some equities.

Officials at the ECB and the Bank of France in Paris declined to comment.

Sovereign Bonds

Other nations represented on the Basel committee tend to have more narrowly targeted aims for amending the list of eligible assets, the people said. These include a push from South Africa for easing rules on corporate debt that is rated higher than the country?s sovereign bonds.

Regulators in the committee?s working groups have reached a provisional deal to retain a split in the LCR between assets that banks can use to meet their entire requirements and those that can only be used to meet as much as 40 percent, one of the people said. Under that agreement, the rules governing how the distinction works would be adjusted.

The accord on this point will be reviewed by the Basel committee at its meeting next month.

The Basel committee brings together regulators from 27 nations including the U.S., the U.K. and China to coordinate global bank rules.

[Bloomberg]