New bank capital and liquidity requirements continue to soften.
With the reported exception of Germany, the Basel Committee’s Board of Governors agreed Monday to changes in bank capital and liquidity requirements to be introduced later this year under Basel III. Several of the changes touch on key points of contention expressed by bank treasurers in comment letters and at the UBS-sponsored annual meeting of The NeuGroup’s Bank Treasurer’s Peer Group last May.
The biggest takeaway from the changes is that bank regulators are responding to concerns about the introduction of new rules in the early phases of economic recovery by extending transition periods or delaying implementation, while allowing room for further change should monitoring and observation indicate adverse outcomes.
This is good news for bank treasurers, but also the treasury departments of their customers who can lower (but not eliminate) their concerns about how Basel III will impact their banking relationships—at least for the time being.
Change highlights
Most of the changes are on the liquidity side of the proposed rules. However, the Basel Committee has agreed to soften some of the proposed new capital requirements related to minority interests, investments in other financial institutions (both important to global banks that plan to grow through acquisition and local bank partnerships), and favorably altered regulatory capital treatment of investments in mortgage servicing rights and deferred tax assets that arise from timing differences.
Most importantly, however, while the Basel Committee has further defined the leverage ratio – targeting a minimum Tier 1 leverage ratio of 3 percent – it has also extended its transition period. A supervisory monitoring period will begin in 2011, where regulators will develop templates to track leverage ratios across banks consistently. This will be followed by a parallel run period from January 1, 2013, until January 1, 2017, where the leverage ratios will be tracked and their performance relative to other measures considered. Bank level disclosures of leverage ratios and their components would begin in 2015. Final adjustments would be made in the first half of 2017, with a view to full migration to Pillar 1 treatment in 2018.
On the liquidity side, the Basel Committee has softened its stance on qualifying assets for liquidity coverage ratios and opened the door to further considerations of net stable funding calculations.
With regard to liquidity coverage ratios, the Basel Committee has among other things:
- Lowered the run-off rate floors for retail and SME deposits: 5 percent instead of 7.5 percent for stable, 10 percent instead of 15 percent for less stable.
- Eased liquidity drag of operational activities to other financial institutions: Basel introduced a 25 percent outflow bucket for custody, clearing and settlement, and select cash management activities performed for other financial institutions, which gives the banks holding trust deposits, for example, a run-off treatment in line with corporate deposits.
- Alter run-off treatment for public sector and government deposits, so that a 75 percent roll-off rate is used for unsecured funding and 25 percent roll-off for secured.
- Undrawn commitments: would also be consistently applied to public and private sector, with 10 percent run-off for credit lines and 100 percent for liquidity lines.
- Establish a “Level 2” of eligible liquid assets (limited to 40 percent of the total) to include government and public sector assets and high-quality non-financial corporate and covered bonds (all with a 15 percent haircut).
Concerning net stable funding, the Basel Committee is considering:
- Raising the available stable funding factor for stable and less stable retail and SME deposits to 90 percent and 80 percent, from 85 percent and 70 percent respectively.
- Lower the required stable funding factor for mortgages from 100 percent to 65 percent.
- Reduce prefunding for off-balance commitments to 5 percent from 10 percent of required stable funding.
- Most importantly, a transitional observation period to weigh the net stable funding requirements’ impact would extend to January 1, 2018.