January 6, 2013 (TSR) – The Group of Governors and Heads of Supervision (GHOS), the oversight body of the Basel Committee on Banking Supervision, met today to consider the Basel Committee’s amendments to the Liquidity Coverage Ratio (LCR) as a minimum standard. It unanimously endorsed them. Today’s agreement is a clear commitment to ensure that banks hold sufficient liquid assets to prevent central banks becoming the “lender of first resort”.
The GHOS also endorsed a new Charter for the Committee, and discussed the Committee’s medium-term work agenda.
The GHOS reaffirmed the LCR as an essential component of the Basel III reforms. It endorsed a package of amendments to the formulation of the LCR announced in 2010. The package has four elements: revisions to the definition of high quality liquid assets (HQLA) and net cash outflows; a timetable for phase-in of the standard; a reaffirmation of the usability of the stock of liquid assets in periods of stress, including during the transition period; and an agreement for the Basel Committee to conduct further work on the interaction between the LCR and the provision of central bank facilities.
A summary description of the agreed LCR is in Annex 1. The changes to the definition of the LCR, developed and agreed by the Basel Committee over the past two years, include an expansion in the range of assets eligible as HQLA and some refinements to the assumed inflow and outflow rates to better reflect actual experience in times of stress. These changes are set out in Annex 2. The full text incorporating these changes will be published on Monday 7 January.
The GHOS agreed that the LCR should be subject to phase-in arrangements which align with those that apply to the Basel III capital adequacy requirements. Specifically, the LCR will be introduced as planned on 1 January 2015, but the minimum requirement will begin at 60%, rising in equal annual steps of 10 percentage points to reach 100% on 1 January 2019. 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.
The GHOS agreed that, during periods of stress it would be entirely appropriate for banks to use their stock of HQLA, thereby falling below the minimum. Moreover, it is the responsibility of bank supervisors to give guidance on usability according to circumstances.
The GHOS also agreed today that, since deposits with central banks are the most – indeed, in some cases, the only – reliable form of liquidity, the interaction between the LCR and the provision of central bank facilities is critically important. The Committee will therefore continue to work on this issue over the next year.
GHOS members endorsed two other areas of further analysis. First, the Committee will continue to develop disclosure requirements for bank liquidity and funding profiles. Second, the Committee will continue to explore the use of market-based indicators of liquidity to supplement the existing measures based on asset classes and credit ratings.
The GHOS discussed and endorsed the Basel Committee’s medium-term work agenda. Following the successful agreement of the LCR, the Committee will now press ahead with the review of the Net Stable Funding Ratio. This is a crucial component in the new framework, extending the scope of international agreement to the structure of banks’ debt liabilities. This will be a priority for the Basel Committee over the next two years.
Over the next few years, the Basel Committee will also: complete the overhaul of the policy framework currently under way; continue to strengthen the peer review programme established in 2012 to monitor the implementation of reforms in individual jurisdictions; and monitor the impact of, and industry response to, recent and proposed regulatory reforms. During 2012 the Committee has been examining the comparability of model-based internal risk weightings and considering the appropriate balance between the simplicity, comparability and risk sensitivity of the regulatory framework. The GHOS encouraged continuation of this work in 2013 as a matter of priority. Furthermore, the GHOS supported the Committee’s intention to promote effective macro- and microprudential supervision.
The GHOS also endorsed a new Charter for the Basel Committee. The new Charter sets out the Committee’s objectives and key operating modalities, and is designed to improve understanding of the Committee’s activities and decision-making processes.
Finally, the GHOS reiterated the importance of full, timely and consistent implementation of Basel III standards.
Mervyn King, Chairman of the GHOS and Governor of the Bank of England, said, “The Liquidity Coverage Ratio is a key component of the Basel III framework. The agreement reached today is a very significant achievement. For the first time in regulatory history, we have a truly global minimum standard for bank liquidity. 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.”
Stefan Ingves, Chairman of the Basel Committee and Governor of the Sveriges Riksbank, noted that “the amendments to the LCR are designed to ensure that it provides a sound minimum standard for bank liquidity – a standard that reflects actual experience during times of stress. The completion of this work will allow the Basel Committee to turn its attention to refining the other component of the new global liquidity standards, the Net Stable Funding Ratio, which remains subject to an observation period ahead of its implementation in 2018.”
- Annex 1: Summary description of the LCR (PDF, 2 pages, 42 kb)
- Annex 2: Complete set of agreed changes to the Liquidity Coverage Ratio (PDF, 2 pages, 36 kb)
Source: Bank for International Settlements
What Precipitated this?
World’s Most Prestigious Financial Agency – Called the “Central Banks’ Central Bank” – Slams U.S. Economic Policy, July 2012
The central banks’ central bank, the Bank of International Settlements or “BIS” – which is the world’s most prestigious mainstream financial body – has slammed the policy of America’s economic leaders.
This is especially dramatic given that the banks own the Federal Reserve, and that the Federal Reserve and other central banks – in turn – own BIS. In other words, BIS is criticizing one of its main owners.
Economics professor Michael Hudson notes:
Paul Krugman has urged the Federal Reserve to simply lend banks an amount equal to their bad loans and negative equity (debts in excess of the market price of assets). He urges a “Keynesian” program of spending to re-inflate the economy back to bubble levels. This is the liberal answer: to throw money at the problem, without seeking structural reform.
[BIS] disagreed last week in its annual report. It said – and I believe that it is right – that monetary policy alone cannot solve an insolvency problem. And that is what Europe has now: not merely illiquidity for government bonds and corporate debt, but insolvency when it comes to the ability to pay.
In such circumstances, the BIS explains, it is necessary to write down the debt to the amount that can be paid – and to undertake structural reforms to prevent the Bubble Economy from recurring.
Too Big Has Failed
BIS has also slammed “too big to fail” banks:
The report [by BIS] was particularly scathing in its assessment of governments’ attempts to clean up their banks. “The reluctance of officials to quickly clean up the banks, many of which are now owned in large part by governments, may well delay recovery,” it said, adding that government interventions had ingrained the belief that some banks were too big or too interconnected to fail.
This was dangerous because it reinforced the risks of moral hazard which might lead to an even bigger financial crisis in future.
See this for background.
Interest Rates Have Been Kept Too Low
BIS has also repeatedly criticized the Fed and other central banks for setting interest rates too low.
BIS’ chief economist William White warned against overly lax monetary policy as early as 2003. As Spiegel reported:
White and his team of experts observed the real estate bubble developing in the United States. They criticized the increasingly impenetrable securitization business, vehemently pointed out the perils of risky loans and provided evidence of the lack of credibility of the rating agencies. In their view, the reason for the lack of restraint in the financial markets was that there was simply too much cheap money available on the market. [Low interest rates equal cheap money.] To give all this money somewhere to go, investment bankers invented new financial products that were increasingly sophisticated, imaginative — and hazardous….
The Telegraph noted:
“The fundamental cause of today’s emerging problems was excessive and imprudent credit growth over a long period. Policy interest rates in the advanced industrial countries have been unusually low,” [White] said.
The Fed and fellow central banks instinctively cut rates lower with each cycle to avoid facing the pain. The effect has been to put off the day of reckoning.
“Policymakers interpreted the quiescence in inflation to mean that there was no good reason to raise rates when growth accelerated, and no impediment to lowering them when growth faltered,” said the report.
In 2009, BIS released a paper amplifying on this point:
Easy monetary conditions are a classic ingredient of financial crises: low interest rates may contribute to an excessive expansion of credit, and hence to boom-bust type business fluctuations. In addition, some recent papers find a significant link between low interest rates and banks’ risk-taking ….
The Fed Allowed Destructive Bubbles to be Blown … and then Used “Gimmicks” and “Palliatives” to Try to Paper Over the Mess
BIS also slammed the Fed and other central banks for blowing the bubble, failing to regulate the shadow banking system, and then using gimmicks which will only make things worse.
As the Telegraph noted reported in 2008:
Nor does it exonerate the watchdogs. “How could such a huge shadow banking system emerge without provoking clear statements of official concern?”
“Should governments feel it necessary to take direct actions to alleviate debt burdens, it is crucial that they understand one thing beforehand. If asset prices are unrealistically high, they must fall. If savings rates are unrealistically low, they must rise. If debts cannot be serviced, they must be written off.
“To deny this through the use of gimmicks and palliatives will only make things worse in the end,” he said.
In other words, BIS slammed the easy credit policy of the Fed and other central banks, and the failure to regulate the shadow banking system.
BIS also slammed “the use of gimmicks and palliatives”, and said that anything other than (1) letting asset prices fall to their true market value, (2) increasing savings rates, and (3) forcing companies to write off bad debts “will only make things worse”.
But Bernanke and the other central bankers (as well as Treasury and the Council of Economic Advisors, the heads of congressional and senate banking committees, and the others in control of American, British, French, Japanese, German and virtually every other country’s economic policy) ignored BIS’ advice in 2007 and 2008, and they are still ignoring it today.
Instead, they are doing everything they can to (2) prop up asset prices by trying to blow a new bubble by giving banks trillions, (2) re-write accounting and reporting rules to let the big banks and other giants keep bad debts on their books (or in sivs or other “second sets of books”) and to hide the fact that they are bad debts, and (3) encourage consumers to spend spend spend!
“The world’s most prestigious financial body”, “the ultimate bank of central bankers” has condemned Bernanke and all of the other G-8 central banks, and stripped bare their false claims that the crash wasn’t their fault or that they are now doing the right thing to turn the economy around.