Risk Management

Relaxed Basel Rules Don’t Increase Bank Risk

The new, less onerous global liquidity rules are sensible and realistic, especially in light of the market and economic pressures facing financial ...
Andrew SawersJanuary 9, 2013

Finance organizations and credit-rating agencies have responded positively to the news that the Basel III liquidity rules will not be as strict as bankers had feared and that there will be a longer run-in time to comply. Experts don’t believe the changes — arguably greater than had been expected — result in greater counterparty risk for companies that, these days, regularly monitor their banks’ financial health.

The Basel Committee of the Bank for International Settlements issued its new plans for determining a bank’s liquidity coverage ratio last weekend. The revisions will allow banks, to a limited extent, to broaden the range of assets that can count as liquidity, so that now investment-grade corporate bonds and some mortgage-backed securities may be included. However, “haircuts” apply to these assets, so, for example, only 50% of a portfolio of corporate bonds would be allowed to count toward the ratio.

Fitch Ratings said the revised proposals “set a more realistic parameter for banks. The revisions are sensible in light of ongoing market and economic pressures and reflect a pragmatic approach to changing regulation.”

The Global Financial Markets Assn. (GFMA) issued a statement welcoming the proposals, which “recognize that in practice there is a range of assets that can provide liquidity.”

The GFMA added that “the agreement reached should help to ensure that there are not over-concentrations in eligible assets.” Many experts had previously warned that the original liquidity proposals, issued in 2010, would force more banks to buy scarce top-quality government bonds, driving up the price of sovereign debt instruments. “They have recognized that there aren’t enough of these types of assets to go around,” said one expert, who spoke on condition of anonymity. “The initial calibration [proposed in 2010] was pretty restrictive. It would have been quite difficult for banks around the world to meet the requirements.”

But do the more relaxed prescriptions not raise the specter of greater counterparty risk? John Grout, policy and technical director with the London-based Association of Corporate Treasurers, says, “The changes may make banks a little more open to liquidity crises, due to the delay in starting and the lower conditions, but remember that there were no rules before now. So does it really make a difference worth worrying about? Probably not. But banks are likely to have lower credit ratings than large investment-grade companies for quite a while.”

In fact, European Association of Corporate Treasurers chair Richard Raeburn said in his blog that the changes and the deadline extension were “significant for the ability of banks to lend to the non-financial sector. As such we should welcome the proposals.”

One expert adds that the rules had been relaxed more than expected “because the regulators don’t want to be seen as standing in the way of the supply of credit to the economy. They are trying to say, ‘if banks aren’t lending you can’t blame the regulators.’”

Andrew Sawers is editor of CFO European Briefing, a CFO online publication.