Basel III - Kicking The Can Down The Road?

Banks have been given several years to meet new rules governing the amount of liquid assets they must hold on their books to see them through a short-term market crash.

The Basel Committee on Bank Supervision has stated that banks would only need to have 60% of the necessary short-term funding in place when the rules become effective in January 2015, and would have until 2019 to fully implement the liquidity coverage ratio (LCR).

The new rules also widen the range of assets that banks can put in the buffer; these now include shares and retail mortgage-backed securities (RMBS), as well as lower rated company bonds. Despite the fact that these can only be included at a hefty discount, this is an indication that the Committee recognises that there are problems within the banks' balance sheets.

The rationale for this easing of the rules was explained by Sir Mervyn King, who told the Telegraph that it had decided to opt for a “graduated approach” to avoid “disruption to the orderly strengthening of banking systems or the ongoing financing of economic activity”.

In other words the Committee was worried that the rules would knock any nascent recovery for six. As to whether this slackening of rules actually helps banks and the global economy recover, or simply kicks the can further down the road, remains to be seen.