International bank capital and liquidity rules agreed by global regulators have been made more flexible to encourage lending and hence economic growth, media reports said.

International bank capital and liquidity rules agreed by global regulators – often cited by private banks seeking to impress clients with their financial strength – have been made more flexible to encourage lending and hence economic growth, media reports said.

At the weekend, global regulators meeting at the Bank for International Settlements gave banks four more years and more flexibility on their “buffer capital”, reversing a move towards a more cautious stance in recent years in the wake of the 2008 financial crisis.

The complex web of standards known as “Basel rules” has been criticized for making the economic cycle, and associated strains on banks, worse rather than less severe because, in the past, the system has worked so that banks have thin capital buffers when economies are strong and suddenly scramble to expand capital when markets turn more volatile.

One specific aspect of the rules is what is known as the "liquidity coverage ratio". This relates to the requirement on banks to hold an amount of highly-liquid assets, such as cash or Treasury bonds, equal to or greater than their net cash over a 30 day period (having at least 100 per cent coverage).

"The LCR will be introduced as planned on January 1, 2015, but the minimum requirement will begin at 60 per cent, rising in equal annual steps of 10 percentage points to reach 100 per cent on January 1, 2019. This graduated approach is designed to ensure that the LCR can be introduced without disruption to the orderly strengthening of banking systems or the ongoing financing of economic activity," BIS said in a statement.

In recent years, those private banks that have high capital ratios, or are part of firms with such ratios, have been keen to stress that fact when speaking to this publication, reflecting how high net worth individuals have increasingly focused on the strength of a financial institution as a reason for choosing to do business with it. The overall size of a private bank is seen as less important than the financial robustness of an institution.

Deadline worries

According to media reports, banks had complained they could not meet the January 2015 deadline to comply with a new global rule on minimum holdings of easily sellable assets from the Basel Committee of banking supervisors and supply credit to businesses and consumers. The committee's oversight body agreed on Sunday to phase in the rule from 2015 over four years and widen the range of assets banks can put in the buffer to include shares and retail mortgage-backed securities, as well as lower-rated company bonds.

The new, less liquid assets can only be included at a hefty discount to their value. Even so, the willingness of regulators to allow the use of such assets marks a significant change of tack from how the rules were shaped after 2008.

Mervyn King, chairman of the GHOS (The Group of Governors and Heads of Supervision) and governor of the Bank of England, said: "The Liquidity Coverage Ratio is a key component of the Basel III framework. The agreement reached today [Sunday] is a very significant achievement. For the first time in regulatory history, we have a truly global minimum standard for bank liquidity. Importantly, introducing a phased timetable for the introduction of the LCR, and reaffirming that a bank's stock of liquid assets are usable in times of stress, will ensure that the new liquidity standard will in no way hinder the ability of the global banking system to finance a recovery."

According to Reuters, Basel Committee chairman Stefan Ingves, who also heads Sweden's central bank, said the changes mean that the average capital buffer at the world's top 200 banks rises from 105 to 125 per cent, meaning it is well above full compliance.

The report said many banks are well below full compliance, especially in some eurozone countries, and they will have to find large chunks of assets over coming years at a time when bank profitability is being hammered.

The Basel Committee also agreed to ease the "stress scenario" for calculating the amount of liquid assets banks must hold, meaning the buffer would be smaller.