Compromise on Basel-III norms is a reminder of power of global banks

If anyone thought the clout of global financial giants was on the wane following the wave of protests against the excesses of Wall Street, they better think again! After months of furious lobbying, both behind the scenes and some pretty direct, banks finally won themselves a reprieve. The deadline to meet the liquidity coverage ratio (LCR) — one of the Basel Committee’s key reforms to strengthen banks — has been pushed back four years. This follows a deal struck by global regulators at Basel last Sunday. The LCR aims to prevent a repeat of the kind of distress we saw in the aftermath of the collapse of Lehman Brothers, by making banks hold an adequate stock of unencumbered, high-quality liquid assets that can be readily converted into cash to meet sudden liquidity needs to ride out a 30-calendar-day liquidity stress scenario. It is somewhat akin to our statutory liquidity ratio (SLR) for which we were often derided in the past. It must be clarified, however, thatSLR in the Indian context is also a way of ensuring a ready source of funds to meet the government’s seemingly insatiable appetite. And not all of it may be unencumbered. Nevertheless, at 23%, it is well above the LCR proposed under Basel III.

In truth, the extended deadline, a “compromise between competing views from around the world”, as Bank of England governor Mervyn King put it, was a foregone conclusion. Banks held a trump card. An additional burden on banks would lead to a credit crunch, they warn, given that they had a huge shortfall if they were to meet the original target. Now, under Sunday’s deal, banks will have to meet only 60% of their LCR obligations by 2015. The full rule would be phased in annually only by 2019. Never mind that the larger issue — whether such regulatory forbearance is only a short-term solution that merely postpones the damage, without addressing the underlying cause — remains unanswered. Juxtapose that with the list of ‘approved assets’ for compliance with LCR such as equities (yes, you read that right!) and securitised mortgage debt and all talk of making financial systems more resilient to risks begins to look suspect.