announcement that rules on banks Liquidity Coverage Ratio
(LCR) will be phased in by 2019 rather than abruptly
implemented in 2015 sparked a rally in European banks on
Monday, while some analysts say it is good news for emerging markets,
especially Central and Eastern Europe.
The LCR was
set up in order to avoid a repeat of the 2007-2008 financial
crisis by ensuring that banks have enough high-quality, liquid
assets to tide them over in case they are faced with net
outflows of cash.
rule of the Basel III banking regulations stipulated that,
starting with 2015, banks should ensure that they keep a ratio
of high-quality liquid assets of 100% of total net cash
outflows over 30 days.
Sunday, regulators agreed that the minimum requirement will
begin at a ratio of 60%, rising by 10 percentage points each
year to reach 100% in 2019, to ensure that the LCR can be
introduced without disruption to the orderly strengthening of
banking systems or the ongoing financing of economic
the eurozone, which had invested massively in emerging markets
during the boom years, are only two-thirds of the way through
deleveraging, according to estimates by Ernst
& Young. Some analysts believe the change in the rule will
slow down this process.
Quijano-Evans, strategist for EMEA at ING Bank, believes the
relaxation of the LCR requirements and the widening of the
criteria to include other assets among the high liquidity ones
should play a tangible part in supporting the global
recovery story in as much as a full implementation by 2015
would have meant continued tight bank lending
opinion, EMEA is likely to benefit most from this Basel
gift, as Western European banks have been gradually
cutting exposure to Central and Eastern Europe, where they had
expanded rapidly during the boom period.
the margin, clearly any relaxation of requirements both for
domestic banks in emerging markets and for international banks
are going to help both domestic growth and global growth,
Peter Attard Montalto, emerging markets economist at Nomura,
told Emerging Markets.
think really given the slew of legislation the additional
gold-plating that happened in many cases by national central
banks, pretty conservative ones like in Eastern Europe,
probably will mean that the effect will be
the end of the day, the amount of time to the implementation of
this means that its not any real help with the immediate
pointed out that in some emerging countries, the domestic rules
were even more strict than the international ones and this
discouraged banks from lending there.
deleveraging by Western banks was likely to continue regardless
of the new rules, as it depended on more structural
issues such as legislation and capital requirements from
the eurozone and banks changing business
But, Montalto said, a lot of deleveraging already got out
of the way last year and this year it would manifest
rather as a lack of new investment by banks in emerging
BOOST TO TRADE AND CREDIT
Not just the extension in the LCR but other measures
announced by the regulators on Sunday will benefit emerging
markets, Patricia Jackson,
EMEIA financial services partner at Ernst & Young told
think its definitely positive. If you look at things like
trade finance, which are very important with emerging markets
and cross-border trade theyve made the requirements much
less penal on trade finance, Jackson said.
have reduced the extent to which the liquid asset buffer is
being driven by different trade finance operations. If
youre carrying out trade finance, you have to hold a
smaller liquid asset buffer than you would have had to
otherwise, that reduces the cost of trade
lower cost of trade finance provides a knock-on benefit in
terms of the cost of trade.
finance, the announcement said, the Basel III regulation will
include guidance to indicate that a low outflow rate
(05%) is expected to apply.
on fully insured deposits from companies, governments, central
banks and public sector entities was halved to 20% and the
outflow rate for non-operational deposits provided by
non-financial corporates, sovereigns, central banks and private
sector entities was cut to 40% from 75%. The interbank credit
outflow rate was also reduced to 40% from 100%.
general there will be effects of the changes on the
requirements on the cost of credit because the liquid asset
buffer obviously has a lower return and so gets passed on in
terms of the margin on lending thats applied, so
thats quite important, Jackson said.
size of the buffer has been cut substantially. Theyve
reduced the outflows that are assumed on various deposits and
liabilities that are used to fund assets, and that reduction in
the assumed outflows will reduce the cost of lending, she