Looser Basel rules boost European banks

From The Financial Times
By Brooke Masters and Alexandra Stevenson in London
January 7, 2013

Shares in French and German banks rallied on Monday on the expectation that they stand to benefit most from moves by regulators to weaken the first-ever global bank liquidity standards to a greater degree than expected.

The Basel Committee on Banking Supervision announced on Sunday that banks would be given until 2019 to comply with new rules requiring them to stockpile enough easy-to-sell assets to survive a 30-day crisis.

The global regulatory standard setter also changed the way the “liquidity coverage ratio” is calculated to reduce the total requirement and said banks could include some equities and mortgage-backed securities in their stocks.

The change immediately helps a slew of institutions – most of them in Europe – that were struggling to meet the tighter draft rules and their 2015 deadline. Universal banks with big retail deposit bases and large corporate lending relationships also benefited disproportionately from the calculation changes.

Shares in Crédit Agricole, Société Générale and Deutsche Bank all rose by about 3 per cent and Commerzbank and Natixis rose by at least 4 per cent. Most US and Asian banks were on track to meet the tougher draft requirements and their shares did not rise significantly.

Adrian Cattley, equity strategist at Citi, said the markets had not expected the rules to be loosened as much as they were.

“Clearly it comes hard on the heels of a general risk rally and the fall in European sovereign risk [over the past couple of months]. It is part and parcel of good news for financial stocks,” he said.

British and Swiss banks already have to meet tougher local liquidity rules but the UK regulator has promised to switch over to the Basel definitions eventually.

“Some banks will now have a much higher LCR than the minimum 100 per cent,” said Andrew Lim, analyst at Espírito Santo Investment Bank.

“These banks will be in a position to reduce liquid asset buffers and increase their stock of higher yielding, relatively more illiquid assets, or else simply reduce their expensive wholesale funding. In either case, it should improve their earnings.”

Banks around the world had lobbied for the changes, saying the draft LCR was too draconian and would constrain their ability to lend. Regulators said the changes made the LCR “more realistic”.

Some analysts said the Basel committee was right to be cautious, given that liquidity regulation is completely new and the world economy is still fragile.

“Liquidity regulation is very tricky to get just right,” said Anat Admati, a Stanford University professor who calls for tougher bank regulation in the forthcoming book The Bankers’ New Clothes. “I hope Basel folks focus on improving their capital regulation proposal. More equity [capital] not only helps but also makes liquidity problems less likely and easier to deal with across the board.”

But Cornelius Hurley, a Boston University professor and former lawyer for the US Federal Reserve warned: “Delayed and diluted liquidity standards for banks increases their risk profiles . . . Per usual, it will be the taxpayers picking up the tab when a wrong-way bet by a [big global bank] turns sour.”

Read the article at FT.com.