Leave liquidity rules out of Basel III legislation, says EBF
Industry group fears European Union legislative process will set LCR and NSFR flaws in stone
The European Banking Federation (EBF) has called on European Union law-makers to exclude the Basel Committee's liquidity coverage ratio (LCR) and net stable funding ratio (NSFR) from the legislative process, claiming the two measures could have severe, unintended effects on the banking sector and wider economy.
"The liquidity proposals set out by the Basel Committee are extremely conservative, and their impact on European banks and the wider economy has not been fully tested," says Wilfried Wilms, senior adviser on banking supervision at the EBF. "We are not challenging the need for liquidity buffers – we have been pushing for more effort to be made in this area for a number of years. We just want to see it done properly."
Regulators want to see it done properly, too, they say. The liquidity measures are contained in the Basel III package of reforms published in December, and both ratios are subject to long observation periods so the rules can be tweaked if unintended consequences come to light – the LCR is due to be fully implemented in 2015, the NSFR in 2018. Speaking at the Risk Europe conference in Brussels last week, Stefan Walter, secretary-general on the Basel Committee, reiterated that regulators are genuinely open to change.
But if tinkering is set to continue for years, changes might be made after Basel's guidelines have been transposed into binding laws – a process due to be completed in the EU by 2013. As a result, the EBF – which represents the interests of 31 European banking associations – called on April 8 for the LCR and NSFR to be carved out of that process, to avoid flaws in the current iteration of the rules being written into stone.
"The LCR and NSFR were drawn up quite hastily, and have encountered fierce opposition. Why put them into legislation now, before the observation process has even begun?" says Wilms. "I do not see any difficulty putting the liquidity measures into legislation at the end of the observation periods."
For their part, regulators say the transposition process is a matter for individual jurisdictions to agree – as long as laws are in force to support timely implementation, they have no concerns.
The LCR is designed to ensure banks hold enough unencumbered, high-quality liquid assets – primarily government bonds – to withstand a 30-day stress period. Under the NSFR, banks have to match their long-term assets with long-term stable funding. The full Basel III package, including both measures, will be transposed into EU law via the fourth Capital Requirements Directive (CRD IV), which is being debated by the European Commission.
Mario Nava, the Commission official leading this process, told Risk in February that the draft text should be published by the end of September. It will then be subject to further debate between the Council of the EU and the European Parliament.
The current formats of the LCR and NSFR have attracted sharp criticism. Some national jurisdictions, including Denmark, South Africa and Hong Kong, do not have large enough sovereign bond markets to fully meet the LCR – amendments were made late in the drafting process to enable banks to use a wider range of assets, but critics still maintain the government bond component is too large. There are also concerns that, by forcing banks to seek more long-term funding, the NSFR will disadvantage smaller players with limited access to the capital markets.
A more detailed article on the future of the LCR and NSFR will appear in the May issue of Risk magazine.
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