Fed to propose banks hold funds for credit drought

Liquidity Tussle

The liquidity coverage ratio was at the center of an international tussle last year, as some central bankers and regulators warned that a draft version of the standard risked causing a credit crunch, while others urged against a wholesale watering down of the measure.

The European Central Bank and the Bank of France were among authorities that warned of negative side effects. ECB president Draghi told lawmakers that the draft standard “strongly penalizes interbank lending.” Regulators also expressed concern that it would curtail lending and make it harder for banks to implement monetary policies.

The Basel liquidity rule agreed on in January expanded beyond an earlier version in what counts as high-quality liquid assets, including acceptance of a limited amount of corporate debt, riskier sovereign debt and common equity. The watered-down rule also gave banks more breathing room, pushing full compliance out another six years.

“It’s clearly a significant component of the overall Basel III capital and liquidity framework,” said Luigi L. De Ghenghi, who advises banks on regulation at Davis Polk & Wardwell LLP in New York. He said it’ll be watched with “great interest.”

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