Banks agree minimum liquidity rules

Euro currency Banks around the world will now have to maintain access to certain levels of cash

Financial regulators and central bank governors from the world's biggest economies have made history by agreeing rules on the minimum quantities of cash and liquid or sellable assets that all banks must hold. It is an attempt to make banks less vulnerable to the kind of runs that shattered Northern Rock and Lehman Bros.

There is an oddity at the heart of today's historic agreement by the oversight body of the Basel Committee on Banking Supervision, which for the first time will impose new minimum requirements for the amount of cash and liquid assets that banks all over the world will have to hold.

The oddity is that most banks already hold considerably more than the new minimum requirement - but the reason they already pass this threshold is because we continue to live in strange and perilous times, with many Western economies parlously weak and the financial system still stressed.

Or to put it another way, over the past four years central banks - such as the Bank of England, European Central Bank and US Federal Reserve - have enormously increased their lending to counteract the weakness of commercial banks and of economies.

And, as a matter of definition, when central banks expand their respective balance sheets they create liquid assets for commercial banks.

So the ample liquidity held by big banks simply reflect the depressed times we live in, where banks are frequently reluctant to make loans to the real economy and deplete their liquid reserves.

Inadequate funds

To put it another way, this is the worst possible time to judge whether the liquidity reform will be useful.

More relevantly, the new rules would force banks to hold vastly more liquid assets than they did in the summer of 2007. Back then big banks barely had enough cash to meet demands for repayment from relatively small numbers of depositors and creditors.

That shortage of cash played a role in taking Northern Rock to the brink of collapse, made it impossible for HBOS and Royal Bank of Scotland to survive without emergency loans from the Bank of England, and was an important factor in the collapse of Lehman Bros.

Even so, and as pointed out by Sir Mervyn King - the governor of the Bank of England who chairs the oversight body of the Basel Committee, which is known as the Group of Governors and Heads of Supervision (GHOS) - the fundamental cause of the crises at these banks and others was that they had too little capital to absorb losses.

Their inadequate holdings of cash was more a trigger or precipitator of their woes, rather than their most basic flaw.

'Troubling paradox'

Perhaps the most striking characteristics of today's agreement - which amends a draft first published in 2010 - is that banks will be allowed to include corporate bonds, some shares and high-quality residential mortgage backed securities in their permitted stocks of liquid assets.

This goes against the grain of central banking and regulatory orthodoxy. In particular, the inclusion of mortgage-backed securities will be seen by some as odd, since these proved to be wholly illiquid and unsellable in the summer of 2007.

That said, arguably there is a much more basic and troubling paradox at the heart of the new rules. Which is that they define cash, central bank reserves and some marketable securities backed by sovereigns and central banks as the highest quality liquid assets.

If you believe that quantitative easing and the unprecedented creation of new money in much of the West - including the UK and US - risks debasing these assets over the long term, or if you believe that the credit worthiness of most Western governments is not what it was, then you would argue that banks are being encouraged to hold excessive stocks of assets that could end up becoming seriously and dangerously loss-making for them.

Robert Peston Article written by Robert Peston Robert Peston Economics editor

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  • rate this

    Comment number 70.

    Even if property prices are stable, mortgages are not easily properly valued.

    Unless the extent of outstanding debt is known, (and it may well not be by he who holds the land interest), the asset is not quantifiable.

    Also, the legal entitlement is not transfered without land registration, and resulting equitable claims are subject to notice, priority etc.

    It's a playground for cheats.

  • rate this

    Comment number 69.

    This is actually a bit of desperation by regulators and is designed to help out desperate banks while seeming all the while to be a bit of regulation that makes things sounder. But there's no bull market coming. There's no money for demand and there can be no growth because we don't make anything. Sovereigns are standing behind banks and banks behind sovereigns and it's a case of waiting for doom.

  • rate this

    Comment number 68.

    We will not emerge from the crash UNTIL the price of money rises to reflect risk of the investment.

    THAT IS AN INDISPUTABLE ECONOMIC ARITHMETIC FACT. (Every previous crash ends like this - there is absolutely no example of current credit easing resolving a credit bubble/asset bubble crash in the whole of recorded time.)



  • rate this

    Comment number 67.

    Shame on the BBC for employing a 5 year old to explain corruption as ... an "Oddity".

    But of course the BBC's job is to placate the public as it's money is given to the banking bandits at the press of a button.

    Yes we have to work 9 to 5 for 50 years, but a few dinners at the Ivy with the hob nobs ensure that our money is given to the MP's chums in the City.

    "Criminal Corruption"

  • rate this

    Comment number 66.

    Since when have mortgages become liquid assets?
    I must have missed that seminar in my accounting degree, but I haven't been for two weeks so I could have missed that gem!

  • rate this

    Comment number 65.

    PS like so many of them, our local country house is owned by a near-billionaire banker. Comes with a Deer Park, of course. Except... I've seen his deer herd. They're ALL WHITE. He COLLECTS ALBINO DEER. With publlic banks, banking profits would go back to hospitals and stuff. Our system - private banks inventing our money and keeping the profits - is about LETTING BANKERS COLLECT ALBINO DEER.

  • rate this

    Comment number 64.

    How on earth can any respectable economist or financial commentator present this insane move as anything other that a last throw of the die in the last chance saloon.

    The absolute certainty is that the people will lose. (and the crocked bankers and their friends in regulators and treasuries will make personal gain.


  • rate this

    Comment number 63.

    It is no oddity that banks already hold more than they are required to!


    Yet again governments are conspiring against the interests of the people.

    The global establishment is propping up the banks with free money so conspiring to collapse the global economy once more by create yet another debt bubble - TOTALLY INSANE but also totally predictable!

    Imprison the crooks!

  • rate this

    Comment number 62.


    "...private banks invent our money and loan it to us..."


    Only if "we" borrow.

    Not everyone does.

  • rate this

    Comment number 61.

    A real shock this. Lets pretend we are making a change to the banking system whereabouts we don't actually change anything and the banking industry remains as parasites feeding off the world. Despite the propaganda that the financial industries are necessary for jobs, they produce nothing for the country, no materials, services, goods, energy, transport, art. They just move numbers around a screen

  • rate this

    Comment number 60.

    Lending money you don't have=leveraging. Many banks leveraged 10 to 1. Next on the list should be insurance companies. They write insurance in disaster prone areas, invest the profits during low claims periods, yet somehow don't have enough money to pay when disasters like Sandy hit. So they raise the rates on all their non-loss customers. Privatize profits, socialize losses.

  • rate this

    Comment number 59.

    Come on Mr Peston, what about the elephant in the room?

    Across the West, private banks invent our money and loan it to us. Result: 30-40% of everything we spend ends up, as it goes back up the chain of production, going back to the bankers as their interest. Trivial solution: create public banks, local and competing, & let THEM invent and lend our money, returning their profit to the government.

  • rate this

    Comment number 58.

    "Prime Minister David Cameron has said reducing the UK's debt burden to ensure it can borrow money cheaply from international investors remains the government's top priority"


    So: reducing the debt's important, as unless this is done it can't be increased. I see...

  • rate this

    Comment number 57.

    I find it hilarious that any one takes anything Peston says seriously

  • rate this

    Comment number 56.

    @21 Because the banks schmoozed up to the political elite, who gave them carte blanche to adopt whatever rules they wanted, eg the repeal of the Glass/Steagal act in the US and deregulation allowed banks to balloon, to be too big to fail. Had the banks been allowed to fail, world finance would have gone into meltdown, that gave them the power to feathr their own nests. They have us over a barrel

  • rate this

    Comment number 55.

    We haven't got a chance

    =>Nope. Governments lost control of the banks long ago. The power of the banks knows no limits. They "create" money from nothing giving it to entities of their choice in exchange for interest payments. There never was cash there in most cases. The system of Mervyn King printing money for the gov to borrow is inane.

  • rate this

    Comment number 54.

    Unbelievable that our own (didn't see it coming) Governor is telling us what's best for us again. He didn't see anything wrong with the system in 2006.
    What people are asuming is that the banks have lots of cash that they wont lend, it's just not true. They are investing our money in what's best for them, nothings changed.

  • rate this

    Comment number 53.

    I challenge anyone here explain why it's a good idea that:

    1. Not to apply insolvency laws to banks (as we do to any other business);
    2. Banks are allowed to counterfeit currency through FRB (this is a criminal offence for anyone else); and
    3. Banks are permitted to embezzle your savings, when they loan out your deposited wages, at profit, to third parties without your consent.

    Good luck!

  • rate this

    Comment number 52.

    @47 They aren't clueless. They run algorithms to see just how much you can stomach without revolt. They use supercomputers to see how much they can ring from you without you taking to the streets and being unproductive. They raid search engines and aggregate data to gauge unhappiness and how much you will tolerate. They alter school curriculums and media to spin you lies.

    We haven't got a chance

  • rate this

    Comment number 51.

    47 NewByzantium
    "...the bankers, economists and politicians are clueless."
    Many of them are not clueless. On the contrary, the real players are very intelligent.

    "They just don't know how to address the problems facing us"
    These individuals in power (I can excuse the doltish Keynesian economists, they're wrong but not ill-hearted) seek to extract wealth from, and profit at, our expense.


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