Under heavy pressure from the banking industry, European regulators are considering loosening some rules that require lenders to maintain deep pools of ultrasafe assets to protect them in a crisis, according to bankers and regulatory officials involved in the discussions.
Policy makers and regulators in the European Union are weighing whether to permit banks to hold a broader variety of assets to meet new safety standards, these people say. Such a change would make it easier for banks to comply with the rules, according to people familiar with the deliberations.
Any relaxation of the rules is likely to spark a fight with policy makers outside Europe and could sow fears that regulators are buckling under industry pressure.
The debate comes as the European banking crisis shows hints of moderating. In recent days, a handful of big European banks have sold bonds to investors, ending an extraordinary monthslong funding drought that stretched back to last summer.
The fight over liquidity rules involves obscure but important issues. During recent financial crises, some big banks collapsed when they lost the ability to fund themselves. Seeking to avoid such liquidity problems in the future, regulators started requiring banks to hold large piles of assets that they can easily sell if they lose access to normal funding sources like the bond market or face an exodus of deposits.
Under current and pending international regulations, those buffers must be composed of a narrow range of high-quality liquid assets, such as cash deposited at central banks and highly rated government bonds.
Leading banks in France, Germany, Spain and the U.K. are now pushing regulators to allow a wider range of assets—everything from gold to blue-chip stocks to mortgage-backed securities—to satisfy the buffers. Some of those assets, such as residential mortgage-backed securities, proved volatile and illiquid during the recent financial crises. But the banks argue that regulations can be crafted in such a way to make them safe for liquidity purposes.
The banks contend that the current rules are overly strict, making it more expensive for them to finance themselves and encouraging banks to gorge on potentially risky assets like government bonds.
"Having too narrow a category of assets, however theoretically pure they are, is just a bad idea. I would much prefer to have a broader range," said Peter Sands, chief executive of Standard Chartered PLC, a major international bank based in London. "There's definitely a live debate about it."
There are signs that the banks' pleas are gaining traction with some officials. European regulators and central bankers say they have grown increasingly worried in recent weeks that overly stringent liquidity requirements could force banks to rapidly shrink by constraining their lending, a development that could harm the Continent's fragile economies.
"I think there's a more-legitimate debate about…whether we might have to think a little more flexibly," said a senior European bank regulator who historically has been a proponent of strict liquidity requirements.
Regulators and central bankers in some countries say they plan to resist watering down of the liquidity rules. "It's a never-ending battle," said a senior international regulator from outside the EU, who joked that banks want everything down to "office furniture" permitted in the liquidity rules. These officials say it would be a mistake to cave into pressure from banks in ways that would allow lenders to rely on riskier assets to guard against future cash crunches.
"That is a danger," said Simon Adamson, a London-based banking analyst with CreditSights Ltd. Regulators "should be fairly strict on the liquidity rules, even if it makes life less comfortable for the banks."
The European Central Bank in December extended nearly half-a-trillion euros (roughly $655 billion) of three-year loans to hundreds of banks across the Continent. The loans, which came with a low 1% interest rate, have defused fears of a looming liquidity crunch with banks struggling to renew hundreds of billions of euros of bonds that are set to mature this year.
The ECB loans, another batch of which will be doled out at the end of this month, have helped thaw funding markets for banks, analysts say. In the past week, at least six banks, including Italy's Intesa Sanpaolo SpA and Britain's Lloyds Banking Group PLC, have issued senior unsecured bonds, which are among the industry's preferred methods of raising funds, according to data provider Dealogic. On Wednesday, Germany's Commerzbank AG announced plans for its own offering.
Even as banks find it easier to fund themselves, they are intensifying pressure on policy makers to make it easier for them to satisfy liquidity requirements.
The debate is taking place in multiple venues. In the U.K., the Financial Services Authority has imposed some of the world's toughest liquidity requirements on banks. Only cash that the banks stash at the Bank of England and top-rated bonds issued by certain governments count toward the liquidity buffers.
In recent meetings with senior FSA and Bank of England officials, British bank executives have pushed for the inclusion of other assets, according to people familiar with the matter. Among those are "covered bonds" backed by assets on the banks' balance sheets, an instrument that is allowed in other European countries.
British regulators say their tough rules have protected U.K. banks from the funding problems afflicting some continental banks, an argument echoed by some bank CEOs.
Elsewhere in Europe, banks are trying to influence policy makers who are drafting rules that will implement a recent international regulatory accord, known as Basel III, across the EU. Currently, regulators in different European countries allow different types of assets to count toward liquidity buffers. The Basel pact will impose uniform standards that allow a limited range of assets.
Bankers are taking aim at the special place allotted in the liquidity rules for government bonds, whose plunging values have left many European banks sitting on big potential losses. The banks argue that the current crisis proves that many sovereign bonds are less liquid than other asset classes that are excluded under the liquidity rules.
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