Why Are Regulators Easing Up on Banks?

Global regulators pulled back on strict new global liquidity rules for banks on Sunday, giving them four more years and greater flexibility to build up their cash reserves.

Banks had complained that they could not meet the January 2015 deadline set by regulators for them to comply with the new rule on minimum holdings of highly-liquid assets, known as the liquidity coverage ratio, while continuing to supply credit to businesses and consumers.

But the pull-back was greater than banks had expected. The Basel Committee of banking supervisors not only agreed to phase in the rule over four years, but also to widen the range of assets banks can count toward the liquidity requirements, most notably allowing them to include shares and retail mortgage-backed securities.

While these less-liquid assets can only be included at a steep discount to their actual value, the changes will nonetheless ease the burden placed on banks by the original draft of rules that was unveiled two years ago. The Basel Committee hopes the changes will prevent banks from cutting back on lending in order to meet liquidity requirements.

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“Importantly, introducing a phased timetable for the introduction of the liquidity coverage ratio…will ensure that the new liquidity standard will in no way hinder the ability of the global banking system to finance a recovery,” Mervyn King, chairman of the Basel Committee and Bank of England governor, told a news conference in Basel, Switzerland on Sunday…

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