EU banks must have cash buffer for crisis – regulators

September 22, 2009

By Huw Jones
LONDON, Sept 22 (Reuters) – Banks in the European Union must have a cash buffer to survive the first month of a crisis, regulators said on Tuesday, sparking industry concern that cross-border groups will face a new patchwork of rules.

The Committee of European Banking Supervisors (CEBS) has proposed non-binding guidelines on banks must hold enough liquidity to survive in the short term without having to raise fresh capital or change their business model.

This is part of wider moves by regulators to apply lessons from the credit crunch which has sent scores of banks to governments for bailouts as money markets dried up overnight.

“It’s like a purse of insurance you hold in order to be able to stay as a going concern in your business and during that time you can plan to survive in the long term,” CEBS member Marco Lichtfous told a hearing on the guidelines.

Banks would have to conduct stress tests to work out how much extra liquidity they would need to last a month if faced with tumbling markets, a ratings downgrade or other difficulties.

“The difference in liquidity between normal times and stress times would be the buffer,” said Lichtfous, also an official with the Luxembourg central bank.

CEBS, which is made up of national banking supervisors from the 27 EU states, wants the core or first week’s liquidity in cash or easily sold assets like government and covered bonds that central banks will also accept as collateral on loans.

A slightly wider range of assets could be included in the liquidity buffer for the remaining three weeks of the buffer but CEBS members said shares may not be eligible as their income is unpredictable.

Spain’s Santander bank told the hearing the guidelines were “too restrictive on the core part of the buffer”, risking too much concentration on some assets.

CEBS members will begin applying the guidelines from 2010, though some EU states like Britain are already rolling out local liquidity rules.

Bankers say they want rules to be global rather than regional or national to stop regulators interpreting them differently and creating problems for cross-border groups.

“We are getting a bottom-up rather than top-down approach to all this, which makes it more complicated for banks that have to apply these rules,” an official at a major European bank said on the sidelines of the hearing.

The guidelines take the same approach to small and big banks, bankers pointed out. Cross-border groups want to avoid having to set up buffers for each subsidiary, which, bankers say, would go against the EU aim of a single capital market.

CEBS member Stefan Schmitz of the Austrian central bank said possible barriers to cross-border flows of liquidity mean that different currencies and legal entities must be taken into account when devising liquidity buffers.

The G20 meets to discuss financial regulation in the U.S. city of Pittsburgh on Thursday and Friday, and has asked the Basel Committee on Banking Supervision to draft global liquidity principles, which are due in coming weeks.

The EU’s executive European Commission may include its own rules on liquidity in a draft law in October to revise the bloc’s bank capital rules. The CEBS guidelines could be dovetailed into the draft law to make them binding along with Basel recommendations.

Britain, with the EU’s biggest banking sector, starts bringing in a mandatory liquidity regime from October that will apply to foreign banks on its turf as well as UK ones, though it will have to work within any EU laws adopted.

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