A committee of central bankers and regulators from more than two dozen countries, including the United States, has disappointingly given in to lobbying by big banks and has watered down important rules meant to strengthen the global financial system.
The change will let banks include risky financial instruments like corporate bonds and mortgage-backed securities as part of their liquid asset reserves, which are meant to cover up to 30 days of cash outflows during crises. And the banks have until 2019, not 2015, to comply fully with the easier standards.
The committee unanimously rolled back the so-called Basel III rules that were adopted in 2010 to make them "more realistic," said Mervyn King, the governor of the Bank of England. The banks argued that requiring most of their liquid reserves to be held as cash and government securities would restrict their ability to lend to small businesses and consumers.
The problem is that the new assets defined as liquid are precisely those that banks found difficult to value and trade in 2008. Relying on them to provide liquidity during a crisis is a recipe for disaster, said Anat Admati, a professor of finance and economics at Stanford University.
But the banks want to be allowed to hold more such assets because they are more profitable than cash or government bonds like 10-year Treasury notes, which were yielding just 1.86 percent a year on Wednesday. Big banks also know that in a crisis they would likely receive emergency loans and capital from central banks and their governments, so why tie up their reserves with assets that provide only modest returns?
Coming four years after the failure of Lehman Brothers, the dilution of liquidity standards suggests that banks are again dictating policy in ways that will put the world at greater risk of another crisis.