EU hails bank liquidity deal as ‘fundamental’ for economic recovery

Michel Barnier July 2012.JPG

The European Commission has hailed an agreement by global regulators in the Basel Committee, which gave banks four more years and greater flexibility to build up cash buffers so they can use some of their reserves to help struggling economies grow.

Michel Barnier, the EU's internal market commissioner who is in charge of regulating the banking sector, hailed the agreement saying: "This is the first time in history that regulators are defining globally harmonised, quantitative liquidity standards."

The deal on liquidity rules, Barnier added, "is fundamental, both for the stability of banks as well as for their role in supporting wider economic recovery."

On Sunday, the Basel Committee gave banks four more years to build a backstop against future financial shocks and allowed a wider range of assets, including stocks, residential mortgage-backed securities and lower-rated corporate bonds.

The liquidity rule is part of the Basel III framework that will force banks to hold up to three times more basic capital than before the crisis to avoid taxpayers having to bail them out.

Under the deal, seen as a victory for the financial sector, banks must comply with the rule by 2019 and can now include a wider range of risky assets in the buffer.

Banks had complained they could not meet the January 2015 deadline to comply with the new rule on minimum holdings of easily sellable assets, known as the liquidity coverage ratio, and at the same time supply credit to businesses and consumers.

Challenges ahead

Yet, there are plenty of challenges ahead on how to implement those rules.

Only 11 of the G20 countries met this month's deadline for implementing Basel III, with the United States and European Union failing to get their rules in place.

Negotiations on an EU law to implement Basel III resume on Thursday (10 January) and some lawmakers want to dilute the liquidity rule further than Basel has done by allowing banks to include any asset central banks accept as collateral.

Under the Basel regime, the rules would run alongside separate rules governing banks' capital, intended to ensure their longer-term stability, known in Europe as CRD4.

"I now call upon the Parliament and the Council to successfully conclude the CRD4 trilogue negotiations in the coming weeks," Barnier said.

The Capital Requirements Directive (CRD), adopted in 2006, is currently undergoing its fourth review at the European Commission (EURACTIV 01/03/10).

EU rules on capital requirements are designed to protect savers and investors from the risk of the failure or bankruptcy of banks. They ensure that these institutions hold a minimum amount of capital. 

In July 2011, Germany was the only member of the Basel Committee of banking supervisors and central bankers to refuse to endorse draft rules on new minimum levels of capital which banks will have to hold.

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