Liquidity observation starts 2011, mandatory January 2015 LONDON: Global banking supervisors agreed on Tuesday to phase in the introduction of a key new global standard on lenders' minimum short-term funding cover, handing further relief to a sector facing a hefty funding gap. The Basel Committee of banking supervisors and central bankers from 27 countries met on Tuesday in South Korea, which is hosting the Group of 20 (G20) leading countries that had called for tougher capital and liquidity requirements in response to the financial crisis. The committee had already agreed to a soft phase-in for its net stable funding ratio, which covers a bank's longer-term liquidity. That measure will be trialed from 2012 and become mandatory in January 2018. On Tuesday the committee said it would also adopt a gradual phase-in for its liquidity coverage ratio (LCR), which will require a bank to hold enough highly liquid assets to cover 30 days of net cash outflows. The LCR observation period will start next year and the rule will become a minimum global standard in January 2015. The rules have faced fierce opposition from banks, which say they would struggle to comply, and bankers said that, while a phase-in of the LCR had been expected, they welcomed confirmation of the delay. “The Committee agreed on key details of the liquidity coverage ratio,” it said. “It confirmed that both the LCR and the net stable funding ratio will be subject to an observation period and will include a review clause to address any unintended consequences.” “The liquidity ratio and net stable funding ratio are some of the most difficult areas as international practices differ,” said Pat Newberry, chair of the UK financial services practice at PWC. “Giving themselves time to look and think carefully has to be a sensible move. If you tighten up liquidity regimes, what does that do to lending volumes? It's much more difficult to forecast than with capital,” Newberry said. The Basel Committee also said it would finalize by year end its proposal on the use of contingent capital, also known as CoCos, bail-in bonds and other non-equity loss-absorbent instruments to pad out a bank's capital requirements. “Getting clarity by the end of the year will help banks a lot to plan capital positions going forward,” Newberry said. Banking industry officials said that banks in Germany and France would welcome the phasing-in of the new liquidity standards. Britain's Financial Services Authority has already proposed its own set of liquidity rules and now will come under pressure to align their introduction with the delayed Basel timetable to avoid market distortions. Industry officials also welcomed the review clause which gives supervisors further wriggle room to delay the new rule if capital raising conditions worsen or other problems emerge. The liquidity rules are part of a wider Basel III package which G20 leaders are set to endorse in Seoul next month. “Higher levels of capital combined with the global liquidity framework will substantially reduce the probability and severity of banking crises in the future,” Nout Wellink, head of the Basel Committee, told reporters Tuesday after its meeting attended by dozens of central bank and banking supervisory officials from 27 countries. “And this helps to safeguard financial stability and economic growth and to reduce the exposure to the public sector and taxpayers.”
