When the Basel Committee on Banking Supervision published their Liquidity Coverage Ratio (LCR) in December 2010 banks warned of the potential impact on lending.
Last week the committee responded positively by updating the regulations, easing liquidity requirements and pushing back the final implementation date from 2015 to 2019. The adjustment of their risk framework has already resulted in share rises with Barclays seeing a gain of 3.8%, Deutsche Bank increasing by 2.8% and Lloyd Banking Group shares augmenting by 1.3%. The major change appears to be what banks can count as ‘high-quality liquid assets’. The previously narrow proposal has now been altered to include some equities and corporate bonds rated as low as BBB, seen as being adequately credit worthy in the credit rating tiers. The review also provides further clarity to proposed regulations and serves as a small positive development for the financial sector during a difficult time. Despite this some analysts have suggested that there will be no major economic or market impact.
Described by Bank of England governor Mervyn King as ‘…a compromise between competing views from around the world…’ the LCR was put in to place to ensure that banks could cope with a financial crisis, similar to the one experienced in 2008. The concern raised by some, however, is how possible it is to ensure financial stability within the banking sector without reducing flexibility. The balance of compliance and profitability looks to continue to be an issue for 2013.