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 190.

    Good article IMHO. Banks should hold 20% cash reserves and businessess should be encouraged to plough back profits and reduce their dependency on loan capital as a source of finance.
    Consumers should also save to buy and the maximum mortgage should be set at 80% and 4 times earnings.
    Noone should get a mortgage unless they can demonstrate an ability to save.
    That's how it was in my day!

  • rate this

    Comment number 189.

    Money is about options, you work for options from employers as employees. Minimum wage is not many options. It is also the root of evil and people kill each other for it and enables corruption. Lobbies influence Politicians giving money for options. Uk has three inquiries for corruption and our politicians have starring roles in the pantomime. I can't name villains to protect guilty/be a spoiler.

  • rate this

    Comment number 188.

    Mods I have not received your email acknowledgement for 187 rejection
    Please forward asap for correction and resubmission many thanks

    Money is about options, we are giving banks trillion options in QE at top
    at the bottom DWP are making people work as slaves with no options or job offers as UK Co's love free workers as they are free and they have more dividend options for profit taking.

  • Comment number 187.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • rate this

    Comment number 186.





  • rate this

    Comment number 185.

    Your report has opened my eyes a little bit into the world of money, I'm no banker, banking adviser, banking advisor consultant or a barking Government advisor to the banking sector. What I am however, is a curious bloke wondering what money really is. Can you help please? There are no programmes on the BBC that educate the likes of me about money and what it is.


  • rate this

    Comment number 184.


    Force them to lend the tax payers/QE bailout until they reach the minimum liquidity figure.


    Confused, are you?

    Lending reduces liquidity, not increases it.

  • rate this

    Comment number 183.

    PR "then you would argue that banks are being encouraged to hold excessive stocks of assets"

    is this because they want to give the banks the green light to purchase perhaps worthless Gov bonds so that they will buy them and prop-up the system, ie a double bind.

    trouble is when it goes bang it really will go bang

  • rate this

    Comment number 182.

    Unifi will confirm that thousands of bank employees have lost their jobs since the financial crisis in 2008. Thousands - including many in investment banking. Most now have lower paid jobs or no job.

    So rememberdurruti at 180, how sure are you that 'austerity' hasn't affected anyone in financial services? Have you just swallowed newspaper headlines about a few high earners?

  • rate this

    Comment number 181.

    #179. virtualsilverlady

    The days of interest bearing savings are long gone.

    Witness the end of endowment mortgages.

    That leaves you with two options. Repayment mortgage where you pay the capital off as you pay interest.
    Interest only where you pay interest and capital as you can.

    If you cannot keep up the payments the mortgage company gets your house.

    Saving money can give negative interest..

  • rate this

    Comment number 180.

    Look, the financial sector is still running (ruining) the country!
    This 'coalition' is just a front.
    The ONLY part of Britain to escape 'austerity measures', the financial sector and it's sponsors, this 'coalition'.

  • rate this

    Comment number 179.

    I see we are accumulating another massive problem as millions of homeowners already struggling with interest only mortgages can no longer save up enough capital to pay off their mortgage,

    Where can anyone safely get a decent return with negative interest rates just going on and on.

    For ordinary honest folk the future looks bleak as far as the eye can see.

  • rate this

    Comment number 178.

    Is that 'level of liquidity' before, or after, a big margin to cover fines and other settlements with various regulators and governments for various mis-deeds?

    I mean we've just seen one Swiss bank close as the result of just one 'fine' from one regulator.

  • rate this

    Comment number 177.

    UK has had three parliamentary inquiries recently regarding corruption for
    Banking-Treasury Select Committee
    Lets hope they nail them down so they don't move again

  • rate this

    Comment number 176.

    I'm concerned that the gov might be smuggling past us, the literalisation of the small print in mortgage agreements.

    That is, even if you only owe £1 and your lender goes bust, the receivers could in principle still take the property.

    This has not been done in the past, because lenders have generally been bailed, and it offends common decency.

    However, times change...

  • rate this

    Comment number 175.
    this article highlights the endowment mortgage scandal of the nineties....
    the red letters, the useless FSA, the corrupt claims management companies, AND also a date past which misselling claims were not accepted.
    And now the scandal resurfaces affecting decent people.
    British financial institutions, take your commissions and bonuses and BASEL orf.

  • rate this

    Comment number 174.

    Minimum liquidity rules are useless in the absence of sensible FRB lending ratios.

    Banker scum are still laughing at us all the way to the golden bonus troughs.

    Banker scum never mention derivatives?

    None of this ever features in the corporate accounts of banker scum?

  • rate this

    Comment number 173.

    Just because Basel says that something is convertible, sellable, it doesn't mean that a bank will actually accept it as payment.

    If banks think that a particular bank is sitting on dodgy assets then that bank will fail. Even if Basel says it is OK.

    Basel is not the ultimate arbiter.

    There is no ultimate arbiter.

    As usual just the psychology of the herd instinct. Again.
    Gets around doesn't it?

  • rate this

    Comment number 172.

    Force them to lend the tax payers/QE bailout until they reach the minimum liquidity figure.

  • rate this

    Comment number 171.

    Basel Committee on Banking Supervision... would make you believe this has something to do with "supervision" as in "democratic" and "transparent" :-)

    They want to be seen as doing something when in fact they just tinker around the edges.

    30-days?! goal in itself? When you try to rush sell something you notice nobody is buying.

    And 2019?!
    No, it's not anymore a "one in a life time event"!


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