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Banks have to pay up

World Business
LONDON/WASHINGTON — Banks have won a victory in their battle to dilute tough rules on liquidity, but they will still have to find trillions of dollars to ensure their funds do not run out in a crisis.

LONDON/WASHINGTON — Banks have won a victory in their battle to dilute tough rules on liquidity, but they will still have to find trillions of dollars to ensure their funds do not run out in a crisis.

Report by Reuters

Heavy lobbying by banks over the past two years has bought them time, but not freedom from requirements that they lock up big new cash buffers globally from 2015.

And while some critics are blasting the Basel Committee for backing off the strictest aspects of the liquidity rule, other prominent reform voices are reluctant to say that it means a global commitment to tough new rules is falling away.

“It is a phase-in. It should be understood not as a repudiation of capital requirements but as phase-ins that are reasonable,” said former US Representative Barney Frank, who co-authored the 2010 Dodd-Frank legislation of financial reforms.

The Basel Committee of banking supervisors, representing most of the world’s capital markets, surprised banks on Sunday with concessions on a planned new liquidity rule to enable them to withstand market squeezes.

Banks and some regulators said the original draft, the first of its kind, was too harsh, tying up vast pools of cash at a time when credit is needed to aid struggling economies.

Basel is giving banks an extra four years to comply with the rule by 2019 and include a wider range of risky assets in the buffer.

Regulators defended the change, with Bank of England governor Mervyn King saying on Sunday that a strong disincentive will be built into the changes.

Banks will have to set aside more capital if they choose to pad out their liquidity buffer with the riskier assets such as bonds backed by home loans, or shares.

Dwight Smith, a partner at the law firm Morrison Foerster in Washington, DC, also noted that banks will have to sell off assets periodically to test their liquidity, and will face other restrictions on how they can count lower-quality assets in the buffer. “It’s not like it’s suddenly open season on all this,” Smith said.

The change is more significant for European banks than for their US counterparts, many of which already hold large liquidity reserves.

Some former regulators said the rethinking of the liquidity rule is reasonable, pointing out that it was first drafted at a time of public anger over bank bailouts.