Official: BASEL 3 liquidity rules eased

Thrugelmir

Originally Posted by HAMISH_MCTAVISH

A number of posters claimed that complying with the new rules would effectively prevent lending from growing for the foreseeable future.

Then ask yourself why the BOE feels it necessary to offer the Funding for Scheme. If all was back to normal.

Generali

I've had a read of the new rules as they apply to the LCR. This is money that banks have to set aside under the new rules to cover their full cash needs for a 30 day period. The idea is that if wholesale funding dries up, solvent banks don't end up going bust through a lack of liquidity. The idea is to prevent contagion and is, IMHO, a sensible idea.

There are 3 changes or, as BIS claims, 2 changes and 1 clarification:

- The range of assets to be included as 'HQLAs' (High Quality Liquid Assets) is to be extended to include RMBS (Residential Mortgage Backed Securites) with a rating of AA or more, equities (no rating necessary) and corporate bonds rated BB or higher. This seems reasonable to me especially at the moment when Central Banks are lending against those assets. If you can borrow against an asset it's reasonable to include it in your LCR.
- The clarification (2nd change IMHO) is to state that the LCR can be used if there is a funding problem(!). It was clear in the original agreement that the LCR was to remain in place at all times. Now, rather sensibly, the agreement has been changed so that if there is an emergency you can use your emergency money. The old agreement was rather like forcing everyone to carry an umbrella in case it rains but not allowing them to put it up once it started raining!
- The final change is to allow the banks more time to bring this in. Again that seems reasonable: there's no point bringing in rules that banks can't follow.

There are some other changes that apply to other parts of the agreement and most are technocratic and dull (stuff like the treatment of Sharia-compliant banking).

The biggie however is the watering down of stress-testing. Under Basel III (and indeed under Basel II) banks had to stress test themselves using certain assumptions to see whether they could survive difficult periods. The rules for doing that have been made a lot less strict.

For example the old rules assumed a bank run leading to a loss of 5% of deposits, the new rules reduce that to 3%. Both are arbitrary numbers of course but it is interesting that they have almost halved this requirement. Some parts of the stress test have effectively been removed entirely, for example you can ignore your entire derivatives business for the purposes of testing (a sop to BNP Paribas and Deutsche Bank).

Generali

Thrugelmir wrote: »

The relaxation makes little difference to UK banks. As majority are well above the requirements to comply with the 2015 level.

Basle 3 is a global regulation. So problems lie elsewhere. Spain being an obvious contender at the moment.

The big change from this POV is allowing RMBS with a rating of AA or higher into the LCR. That means demand for mortgage backed securities will increase which should increase mortgage funding.

michaels

1) More lending? We are back to the question of whether it is supply or demand that is driving volumes

2) You can relax the rules as much a you want but if your counter-parties don't trust you even if you comply with all the (relaxed) rules then they won't trade with you.

HAMISH_MCTAVISH

Generali wrote: »

We go back to a position where banks can lend money to people to buy houses again.

That would certainly make a refreshing change after the last 5 years nonsense.

But do you really think it'll actually be that big a change right away?

I'll try to have a look at the new agreement at some point to see what it means for high LTV lending as that's one of the important bits.

Yes that's absolutely critical if young people are to have a chance at buying any time soon.

This is good news and was inevitable really.

Agreed.

HAMISH_MCTAVISH

Generali wrote: »

The big change from this POV is allowing RMBS with a rating of AA or higher into the LCR.

Out of curiosity, any idea what percentage of existing UK RMBS would have this rating or better?

That means demand for mortgage backed securities will increase which should increase mortgage funding.

It should indeed.

Still don't think it'll be enough to get the mortgage markets back to normality, but a step in the right direction, and from what you say here, perhaps a bigger step than I first thought.

HAMISH_MCTAVISH

Thrugelmir wrote: »

Then ask yourself why the BOE feels it necessary to offer the Funding for Scheme. If all was back to normal.

These rules were changed today.

Not 6 months ago when FLS was initiated.

Also worth noting that wholesale funding has been increasing lately, despite your claims to the contrary.

I'm not saying we're back to normal, far from it, lending needs to at least double for a proper recovery in the economy and housing markets.

But things are improving markedly, hence why monthly mortgage approvals are up 20% over the last 6 months or so, and given the continued stream of good news about lending it seems that improvement will continue.

pqrdef

Generali wrote: »

The idea is that if wholesale funding dries up, solvent banks don't end up going bust through a lack of liquidity.

But are there any solvent banks?

Generali

pqrdef wrote: »

But are there any solvent banks?

There are plenty but in many cases that was only because they were given money.

Thrugelmir

Generali wrote: »

That means demand for mortgage backed securities will increase which should increase mortgage funding.

From who though, on a large scale?