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Financial lobby wins concessions on liquidity

The heads of the world's top regulators and central banks have approved plans to require banks to hold significantly higher levels of liquid assets in order to reduce the chances of a repeat of the 2008-09 financial crisis. But in an apparent response to financial sector lobbying, they also relaxed the definition of what will be considered a liquid asset, and said banks will have four years longer than expected to implement the new standards.

The Group of Governors and Heads of Supervision (GHOS), meeting in Basel, approved the Liquidity Coverage Ratio (LCR) put forward by the Basel Committee on Banking Supervision. Sir Mervyn King, chairman of the GHOS and outgoing Governor of the Bank of England, said the objective of building up liquidity buffers of easily saleable assets was to prevent commercial banks using central banks as a "lender of first resort" in times of financial stress. Nevertheless, the new Basel liquidity requirements will only be gradually phased in between 2015 and 2019. And in its list of what regulators will consider to be "high quality liquid assets", the GHOS includes equities, lower-grade corporate bonds and some mortgage-backed securities, all of which will make the adjustment for banks easier. During the 2008-09 financial crisis many banks found themselves shut out of wholesale money markets as investors panicked about the large amount of toxic subprime mortgage debt that institutions had accumulated. The Bank of England and the British Government were forced to offer liquidity support and capital injections into the UK financial sector peaking at £1 trillion.

The US Federal Reserve and the European Central Bank also had to offer massive levels of support to American and European banking sectors in the crisis to prevent lenders collapsing as they too were shut out of global credit markets. UK banks have complained that the requirement of the Financial Services Authority that they hold higher levels of liquid assets in the wake of the financial crisis has impeded their ability to lend to the British economy.

Rather than being imposed by 2015 as initially expected, the Basel liquidity rules will now be phased in between 2015 to 2019. The rules on liquid assets will also be less stringent than banks feared.