Global regulators relax liquidity requirements for banks

Faced with uncertain world economic conditions, global financial regulators have decided to relax minimum cash requirement norms for banks to help them tide over any month-long liquidity stress scenario.

The deadline for the full implementation of the stiff liquidity norms or Liquidity Coverage Ratio (LCR) for banks, that were to kick in from 2015, has been extended till 2019. Oversight panel GHOS, that includes representation from India, of the Basel Committee on Banking Supervision have decided to ease the LCR regulations.

The Basel Committee, a grouping of top regulators and central bankers, had mooted the stiff liquidity requirements for banks to ring fence as well as prevent financial disruptions.

A decision to relax the regulations were taken by the Group of Governors and Heads of Supervision (GHOS) -- an oversight panel of the Basel Committee -- during their meeting on Sunday.

"Importantly, introducing a phased timetable for the introduction of the LCR, and reaffirming that a bank's stock of liquid assets are usable in times of stress, will ensure that the new liquidity standard will in no way hinder the ability of the global banking system to finance a recovery," GHOS Chairman Mervyn King said in a statement.

A major component of the Basel III banking norms, LCR aims to ensure that a bank has an adequate stock of unencumbered high quality liquid assets to meet liquidity needs for a 30-calendar day stress scenario.

The LCR would be introduced as planned on January 1, 2015, but the minimum requirement would be 60 per cent. The same would be increased by 10 percentage points in the subsequent years to reach 100 per cent on January 1, 2019.

According to GHOS, this graduated approach is designed to ensure that the LCR can be introduced without disruption to the orderly strengthening of banking systems or the ongoing financing of economic activity.

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