Banks Get More Time and Flexibility for Basel-III Compliance

Banks around the world have received a breather from the global banking regulators as they relaxed a deadline to become Basel-III compliant, a rule which stipulates minimum holding of cash and liquid assets.

The regulators also broadened the definition of liquid assets to include shares, retail mortgage-backed securities (RMBS) and lower-rated company bonds. However, the less liquid assets could be considered as buffer assets at a heavy discount to their value.

The new rules are meant to strengthen the banks against the possibility of another financial crisis to the magnitude of Lehman Brothers in 2008 and to avoid the situation where in the taxpayers have to bail out the cash-strapped banks.

The Basel Committee of banking supervisors consisting of bank regulators from nearly 30 countries extended the time frame for banks to become Basel-III compliant to four more years as against the previous deadline of January 2015.

The banks had complained that they were not able to meet the previous deadline as the guidelines would hinder lending and hurt economic growth.

According to the new rules, the banks have to phase in the compliance in 2015 and are expected to meet at least 60 percent of the total buffer assets by then. They are required to meet 100 percent of the "liquidity coverage ratio" by January 2019 to survive an acute 30-day crisis.

"For the first time in regulatory history, we have a truly global minimum standard for bank liquidity," said Mervyn King, chairman of the oversight body in Basel, Switzerland.

"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".

The new rules have put the buffer assets of world's top 200 banks to 125 percent from the existing 105 percent, well above what is required for full compliance.

However, some of the banks, especially from the eurozone region where bank profitability is hammered have to struggle to raise an estimated trillion euros of assets to reach the compliance. The new guidelines are expecetd to ease pressure on those banks to meet the liquid assets deadline.