Banking Crisis

Global Bank Chiefs Relax Basel Rules To Ease Strains

Tom Burroughes, Group Editor, 7 January 2013

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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.

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