World finance: Going with the flow

Global bank regulators have watered down planned liquidity targets, influenced by a fragile banking industry that nevertheless still wields considerable lobbying power. The changes are positive for bank shares, corporate bonds and mortgage-backed securities in the short term, but less encouraging for financial stability in the long term.

Given the average executive tenure at large firms, few bank bosses will remain at the helm in 2019. Still, these executives lobbied aggressively against new liquidity rules under debate by the Basel Committee on Banking Supervision, and celebrated a victory on January 6th. According to a statement from the Basel-based umbrella group for national financial regulators, full implementation of the standards will now be delayed until 2019, four years later than previously scheduled. Changes to what counts as “high quality” assets and forecasts for stress in funding markets will also make the rules less onerous for banks to meet.

Bank shares, particularly distressed European lenders, rallied sharply on the news. Although the revisions will protect profits and reduce the pressure on banks to shore up their balance sheets – improving their ability to boost credit to weak economies, at least in theory – the long-term implications for financial stability are more problematic.

The liquidity coverage ratio (LCR), a key component of the Basel III regulatory standards, governs the quantity and quality of marketable assets banks must hold to meet a freeze in funding sources or outright run on deposits. Banks must maintain a large enough buffer of high-quality assets to withstand 30 days of stress, as defined by the Basel committee.

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