Not many recently promulgated regulations benefit banks, and even fewer help their corporate customers. But a new standard by the Basel Committee on Banking Supervision does both.
In January, the committee relaxed some proposed new rules on bank liquidity buffers that were designed to keep financial institutions from melting down in a crisis. (The rules are part of the ongoing Basel III reforms to banking regulation.) Specifically, the committee eased measures that would have made some kinds of credit lines more costly to hold on the balance sheet.
The revision not only is a win for global banks but also reduces the likelihood that banks’ appetite for underwriting commercial lines of credit will be curbed in the coming years.
The so-called liquidity coverage ratio (LCR) forces banks to maintain a percentage of “high-quality, unencumbered assets” to meet cash outflows for a 30-day “stressed period” — essentially, a financial crisis that causes a run on banks. The committee’s original stress-test model assumed that during a crisis, nonfinancial companies would draw down 100% of their untapped credit lines. In turn, banks would have had to hold a higher amount of liquid assets — which generally earn much lower returns — for each dollar committed to corporate lines of credit.
The revised rules assume only a 30% drawdown rate for the unused portion of liquidity facilities borrowed by nonfinancial corporations, sovereigns, and central banks, according to documents released by the Bank for International Settlements.
Only credit lines classified as “liquidity facilities” are affected. Basel defines a liquidity facility as any committed, undrawn “back-up facility that would be utilized to refinance the debt obligations of a [company] in situations where such a [company] is unable to rollover that debt in financial markets.” An example would be revolvers that backstop commercial-paper borrowing.
Loan facilities used for general corporate purposes or working capital will be classified as credit facilities, and banks will have to hold liquid assets of only 10% against them.
The Basel Committee also expanded the kinds of assets banks can hold against credit lines and other obligations. The revisions deem corporate bonds rated as low as BBB- and some corporate stocks as “high-quality liquid assets,” which could make them more attractive for banks’ treasury departments to hold. Previously, common equity was not included, and corporate debt had to be rated AA or higher.
Not all common equity and debt would qualify; for example, the Basel rules say the corporate debt or equity would have to “have a proven record as a reliable source of liquidity in the markets even during stressed market conditions.”
Banking lobbyists have been arguing that the original LCR rules would have given banks a limited number of assets to invest in and could have caused an overreliance on investments in sovereign debt.
The deadline for international financial institutions to comply with the LCR was also pushed back, to January 1, 2019, from the original 2015. The committee said it would phase in the LCR, requiring banks to hold a ratio of liquid assets to cash outflows of 60% by 2015, and to increase that level 10 percentage points in each of the subsequent four years.