Banks Rebel against Liquidity Requirements and Ring-fencing

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Hard times for big banks. In the US they are making a last minute push to ease the new global liquidity requirements, that would force them to come up with an additional $800bn in easy-to-sell assets under the proposed standards. On the other hand, UK banks are facing the threat of a break-up if they don’t fully implement ring-fencing, that is the financial separation between retail and investment operations without being divided in two separate entities.

US banks claim to have increased their holdings of liquidity assets to $700bn, almost the half of the $1.5tn shortfall identified at the end of 2010. Instead of raising the difference, they want to relax new Basel III requirements, as the whole system appears to be much more liquid than few years ago.

The Basel Committee on banking supervision is supposed to discuss and approve the liquidity coverage ratio (LCR), the way to make sure that banks have enough funding and easily liquidated assets to survive a short term market crisis that might lay the depositors’ savings on the line.

US banks argue that the definition of liquid assets is too narrow and that the increasing requirements could reduce their lending capacity. According to a Clearing House study, US banks had 81% of the liquid assets they require as of July 2012, up from 59% two years earlier because of increased holdings of government bonds and deposit growth.

British banks fear a break-up

In the UK, banks are in a stronger position since Britain enacted the liquidity rules in 2009. According to the Bank of England, the country’s top five banks have 13% more liquidity assets than required. But still they are facing the offensive of the Parliamentary Commission on Banking Standard, which aims to a full separation of retail and investments arms if banks don’t cope with a complete ring-fencing of their operations, not allowing leaks from an area to the other.

The Parliamentary Commission is set to endorse the core Vickers proposals, which intends to protect customers’ deposits from any losses generated by the lenders’ market. Sir John Vickers, chair of the independent Commission on banking, prompted the ring-fenced operations to have a capital buffer of at least 10%, regarding also financial instruments capable of absorbing losses and not just traditional equity. According to the proposals, it should be easier to change account providers due to a higher competition among high street banks.

“Banks” says Paolo Ferrari, a former Citigroup banker quoted to ADVFN Financial News, “use depositors’ savings to invest, borrow and trade.  To avoid another financial meltdown like that in 2007, a separation between retail and investment operation is desirable, but difficult to enact. Also, with retail operations split from investments’, rating agencies would be facilitated in rating the commercial area, which is much less risky than the market-oriented one.”

While agreeing with the chancellor, Mr Osborne, on the need to preserve the Vickers proposals, Sir Mervyn King, the governor of the Bank of England has repeatedly said he was in favour of a full separation of universal banks. The recent imposition of record fines to HSBC and Standard Chartered over allegations of money laundering and breaches of sanctions towards Iran, even if not directly related with ring-fencing, have given a decisive push to the claim of a radical reform of the whole system.

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