Analysis:It's not a game-changer, but Irish banks are likely to have exhaled a sigh of relief when the Basel Committee on Banking Supervision relaxed requirements for its proposed liquidity buffer under Basel III on Sunday.
As Eamonn Hughes, an analyst with Goodbody Stockbrokers noted, the committee’s decision will give Irish banks some “breathing space” as they grapple with the need to restructure their balance sheets.
Under the new rules, banks won’t have to meet full requirements for a liquidity coverage ratio until 2019, with a 60 per cent phasing-in period starting in 2015. The measure requires banks to maintain a minimum amount of liquid assets to weather a 30-day crisis period.
Liquid assets
Previously, the rules were to be imposed by January 2015, while concessions have also been made with regard to the type of assets classified as “liquid”, with a broader range, to include corporate bonds and securitisations, now seen as eligible.
The changes mean there is now a common deadline of 2019 for banks to meet all aspects of Basel III: capital ratios; the liquidity coverage ratio; and the net stable funding ratio, which requires banks to hold a certain proportion of long-term funding.
For Irish banks, the main benefit of the delay is that it will give them extra time to bolster their balance sheets and avoid a “margin burn” by not necessitating borrowing at higher rates to fund purchases of lower-yielding liquid assets, in order to satisfy the liquidity ratio.
“It will be helpful for net interest margins, but to calculate by how much is very difficult,” said Hughes.
Had banks been required to meet the full requirements by 2015, it could, according to Stephen Lyons, an analyst with Davy stockbrokers, have “depressed their ability to return to profitability”.
‘Less detrimental’
“It gives the banks greater time to see their own credit spreads reduce further, such that the impact of adding a stock of low-yielding liquid assets is less detrimental to their profitability,” he added.
Another advantage of the move for Irish banks is that National Asset Management Agency bonds are liquid assets and therefore should be considered eligible under the amended rules. This will reduce the amount of additional liquid assets Irish banks might need to acquire.
But given that the Basel Committee’s incentive in imposing less onerous liquidity requirements on banks was to free up funds for lending, are we likely to see Irish banks follow suit?
“They absolutely will have more money to lend over time – but I wouldn’t necessarily say it will apply next month,” said Lyons.
Until now, Irish banks have concentrated on meeting capital requirements under the prudential capital adequacy review process, and the liquidity coverage ratio would have been a secondary consideration.
In that regard, it’s unlikely the banks would have started allocating capital to meet the ratio requirements until later this year at the earliest, so they won’t have funds that could immediately be switched from this to lending.
While it has been noted that the latest amendments mark a dilution in the original Basel III accord, according to Hughes it is a sign of a “little more pragmatism” from the Basel Committee.
“Banks have come out of an extensive financial crisis, so they have to be careful in terms of how quickly they get banks to move to strict deadlines,” he said.
