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Banks will be allowed to dip into liquidity reserves during financial difficulties, says international banking committee


Banks will be allowed to go below new minimum liquidity levels set by global regulators in times of particular financial difficulty, a group of international banking supervisors has announced.

The Governors and Heads of Supervision (GHOS) of the Basel Committee on Banking Supervision confirmed in a statement that the Committee's proposed new Liquidity Coverage Ratio (LCR) will come into force as planned from 2015.

"Once the [Liquidity Coverage Ratio] has been implemented, its 100% threshold will be a minimum requirement in normal times. But during a period of stress banks would be expected to use their pool of liquid assets, thereby temporarily falling below the minimum requirement," the GHOS said in a statement.

The GHOS is the body which overseas the work of the Basel Committee on Banking Supervision. It is made up of central bankers from 27 countries and chaired by Sir Mervyn King, governor of the Bank of England.

The international banking agreement known as Basel III introduces a new baseline requirement for capital, leverage and liquidity. Banks will have to increase both the quantity and quality of capital they hold, while accounting for higher levels of risk-weighted assets. The requirements of the agreement will be officially phased in between 2013 and 2022.

The LCR requires a bank to hold enough high-quality assets which can be readily converted into cash to meet its needs for a 30-day time period during a 'stress scenario' specified by the Committee.

The Basel Committee has been asked to modify the existing liquidity rules to allow for the new exemption, the GHOS said. It will also provide additional guidance that would justify banks dipping into these reserves.

The GHOS said it would decide by the end of the year whether they would expand the definition of "high quality liquid assets" that may be included in the buffer in response to "specific concerns" by the banking industry. However, it stressed that any changes would apply "only to a few key aspects and will not materially change the framework's underlying approach".

The supervisors' stance on the LCR is a departure from the strict capital standards that will apply once the agreement comes into force. Basel III provides that banks must hold tier one capital of at least 7% of their risk-weighted assets by 2019, meaning that for every £10 that banks lend out they must hold 70p in reserve against potential losses. The UK's Independent Commission on Banking (ICB) proposed a stricter capital ratio of 10% for UK retail banks in the banking reform recommendations it made to Government last year. Tier one capital consists in the main of shareholders' equity and disclosed reserves.

Sir Mervyn King said that the aim of the LCR was to ensure that central banks would only be called upon to act as lenders of last resort in normal times.

"While the LCR may represent a significant challenge for some banks, the benefits of a strong liquidity regime outweigh the associated implementation costs," he said.

The GHOS also announced that each country the new requirements would apply to had agreed to undergo a "detailed peer review" of its implementation plans to make sure the international approach was standardised. Initial reviews, which will begin in the next few weeks, will assess implementation of the new standards in the European Union, Japan and the United States and the results will be made public.

The Basel Committee will monitor how countries adopt the rules on an ongoing basis, the GHOS said. It will also monitor how risk-weighted assets are measured in practice to ensure a consistent approach across jurisdictions.

The Committee's focus on implementation represented a "significant new direction", Sir Mervyn King said.

"The level of scrutiny and transparency applied to the manner in which countries implement the rules the Committee has developed and agreed will help ensure full, timely and consistent implementation of the international minimum requirements," he said.

Stefan Ingyes, Chairman of the Basel Committee and Governor of the Swedish Riksbank, said that the peer review process was a "clear signal" that implementing the new standards effectively was a top priority for the world's banks.

"Raising the resilience of the global banking system, restoring and maintaining market confidence in regulatory ratios and providing a level playing field will only be achieved through full, timely and consistent implementation," he said.

The Basel Committee will publish its final recommendations by the end of 2012, the GHOS said.

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