Banks win in effort to change Basel III coverage rule

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The big issue driving regulatory decisions right now may be shading toward the economic impact of regulations and away from the raw safety of the banking system.

This is not to say that the Group of Governors and Heads of Supervision, or GHOS, isn't interested in global systemic financial soundness. There's no doubt it is. But it has to acknowledge that there are some procyclical elements of Basel III's liquidity coverage ratio, and the last thing the Basel regulators wanted was to be accused of being a drag on economies. Certainly not at a time likes this.

The result is that banks have won a significant reprieve on the liquidity coverage ratio (LCR). They'll have four more years to meet key targets, and they'll be able to use a longer list of assets that will satisfy the requirement, including mortgage-backed securities. The additional securities, however, will be marked down more aggressively than those that would have been eligible under the original LCR, and they will only be able to count for up to 15 percent of a bank's LCR buffer, notes Bloomberg.

Banks would only have to meet 60 percent of the original LCR obligations by 2015, and the full rule would be phased in annually through 2019. This is a significant win for banks, who have lobbied hard for a more amenable LCR. They argued successfully that the LCR, as originally written, would have crimped lending and economic growth.

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