Banks’ victory on liquidity will still cost them dear

From Reuters
By Huw Jones
January 7, 2013

LONDON, Jan 7 (Reuters) – What first appears as a victory for banks in their battle to dilute draconian rules on liquidity will still mean they have to find trillions of dollars to protect themselves against their funds running out.

Heavy lobbying by banks over the past two years has bought them time but they will still have to lock up big new cash buffers globally from 2015.

The Basel Committee of banking supervisors, representing most of the world’s capital markets, surprised banks on Sunday with concessions on a planned new liquidity rule so they can withstand market squeezes.

Banks and some regulators said the original draft, the first of its kind, was too draconian, tying up vast pools of liquidity at a time when credit is needed to aid struggling economies.

Most analysts saw the changes as a reflection of economic reality though one former Fed official said delaying and diluting the rule will increase risks from banks.

“Per usual, it will be the taxpayers picking up the tab when a wrong-way bet by a ‘too big to fail’ bank turns sour,” said Cornelius Hurley, a director at Boston University’s centre for finance and former counsel to the Fed.

Basel is giving banks an extra four years to comply with the rule by 2019 and include a wider range of risky assets in the buffer but Bank of England Governor Mervyn King said on Sunday a strong disincentive will be built into the changes.

Banks will have to set aside more capital if they choose to pad out their liquidity buffer with the riskier assets such as bonds backed by home loans, or shares…

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