The oversight body of the Basel Committee on Banking Supervision – The Group of Governors and Heads of Supervision (GHOS) – pleasantly surprised banks on the onset of the New Year by delaying the implementation of new liquidity rules with full effect by four years. These rules, imposed by the Basel Committee in 2010, required banks to hold adequate cash or liquid assets in hand to withstand another financial crisis.
With certain amendments, the Liquidity Coverage Ratio (LCR) will be introduced on January 1, 2015, as planned earlier. However, the GHOS announced that it would be subject to phase-in arrangements, aligning with the Basel III capital adequacy requirements. Notably, the minimum requirement of LCR will begin at 60%, with an annual increase of 10% to reach 100% on 1 January 2019.
The committee has also amended the range of assets, which banks can use as a buffer. These include shares and retail mortgage-backed securities (RMBS) along with lower rated company bonds acting as the cushion.
The step has been taken to build up cash position and help stimulate economic growth with the use of banks’ reserves. Moreover, such moves will restrict shrinking loans by banks, which took in effect to abide by the rule.
Complying with stringent regulations is not a major concern for most of the global banks including Wells Fargo & Company (WFC - Free Report) , HSBC Holdings plc and JPMorgan Chase & Co. (JPM - Free Report) , but it would be difficult for the banks to optimize business investments. Thus, banks will need to reassess and restructure their operating models to be successful, which are expected to take considerable time.
The introduction and acceptance of Basel III standards illustrates the fact that the industry has been adopting tougher regulatory measures to prevent the recurrence of a global financial crisis and restore public confidence.
According to GHOS, LCR stands out as a main factor in the Basel III framework. Determination of a truly global minimum standard for bank liquidity has been achieved for the first time in regulatory history. Such moves by the committee assure that the new liquidity standard will not thwart the ability of the global banking system to rejuvenate recovery.
Overall, a key determinant for a quick recovery will be the quality of risk analysis and risk-awareness in decision-making and incentive policies. Thus, we believe that accumulating larger capital buffers over the cycle and reducing pointless complexity in the business is crucial to the performance by the banks going forward.