Tuesday 15 January 2013

Basel eases liquidity rules for Banks


International financial regulators have eased rules on minimum quantities of cash and liquid assets all banks must hold, set to take effect in 2015. The agreement, by the body that oversees the Basel Committee on Banking Supervision, is an attempt to make banks less vulnerable to runs. The new "liquidity coverage ratio" will be phased in from 2015 and take full effect four years later.

The new rules are part of efforts to prevent financial shocks such as those prompted by the 2007 run on Northern Rock in the UK, or by the 2008 collapse of Lehman Brothers in the US. Banks will have to hold enough cash and easily sellable assets, to tide them over during an acute 30-day crisis. The final version of the rules updates a draft version put forward more than two years ago. The new version allows banks to hold a broader range of eligible assets, including some shares, corporate bonds, and high-quality residential mortgage backed securities. It also gives them more time to comply with the new standards.

The new rules would force banks to hold vastly more liquid assets than they did in 2007 when big banks barely had enough cash to meet demands for repayment from relatively small numbers of depositors and creditors, our correspondent adds. They are part of the broader "Basel III" package of reforms, which will require lenders to set aside more capital to absorb losses. The Basel Committee brings together representatives regulators from 27 nations.

Basel Norms

  • The Basel Committee on Banking Supervision provides a forum for regular cooperation on banking supervisory matters. Its objective is to enhance understanding of key supervisory issues and improve the quality of banking supervision worldwide.
  • Basel is a set of standards and practices developed for global banks to ensure that they maintain adequate capital to withstand periods of economic strain. It is a comprehensive set of reform measures designed to improve the regulation, disclosures and risk management within the banking sector.
  • Basel I norms was introduced in 1998, focused almost entirely on credit risk. It defined capital requirement and structure of risk weights for banks.

  • Basel II was introduced in 2004, laid down guidelines for capital adequacy, risk management and disclosure requirements.
  • It is widely felt that the shortcoming in Basel II norms is what led to the global financial crisis of 2008. That is because Basel II did not have any explicit regulation on the debt that banks could take on their books, and focused more on individual financial institutions, while ignoring systemic risk. To ensure that banks don’t take on excessive debt, and that they don’t rely too much on short term funds, Basel III norms were proposed in 2010.

  • Basel III establishes tougher capital standards through more restrictive capital definitions, higher risk-weighted assets (RWA), additional capital buffers and higher requirements for minimum capital ratios. It also introduces new strict liquidity requirements.

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