Didn’t think the quality collateral scarcity issue was a big problem?
Seems the fast diminishing pool of ‘risk-free’ assets is a big enough issue to have the Basel Committee on Banking Supervision completely change its mind on the role of government bonds in its new banking rules.
Bloomberg has the story here:
The Basel Committee on Banking Supervision, which coordinates regulations for 27 countries, may let banks use equities and more corporate debt, in addition to cash and sovereign bonds, to satisfy new short-term liquidity standards, said two people with direct knowledge of the plans who requested anonymity because the talks are private.
The move could reduce demand for European government securities, making it harder for nations on the brink of insolvency to fund themselves. “One of the central pillars of the Basel III framework is the notion of a risk-free asset class,” said Matthew Czepliewicz, a banking analyst at Collins Stewart Hawkpoint Plc in London. “That central pillar is disintegrating. Basel is quite clearly going to have to be revised.”
Since rules on liquidity and capital known as Basel III were approved in 2010, holders of Greek debt have agreed to a 50 percent writedown, while prices of Italian, Spanish and Portuguese bonds have fallen as yields hit euro-era highs. Regulators now face a balancing act between acknowledging investors’ loss of confidence in sovereign debt, which has contributed to a 30 percent decline in bank shares this year, and the need to avoid undermining governments’ credibility.
It’s worth noting that the Financial Times had said as much in September.
Of course, it’s a wise move for more than just the fact that investors have lost confidence in a lot of sovereign debt since 2010. There was arguably never enough quality government bonds to go round in the first place. Just ask the Australian central bank.
More corporate debt and equities being used as a liquidity buffer, meanwhile, could be just the pop the equity markets need.
And that’s largely because the rush for quality collateral goes beyond the Basel III buffer requirements. Not only is the increased use of Central Counterparties (CCP) encumbering ever more collateral, bilateral funding markets are becoming more fussy about the sort of collateral they accept. In many cases in Europe only the best quality government paper (French and German) will do. There’s also the additional encumberance that comes with larger haircuts being charged when more risky assets are used as collateral.
In other words, alongside this general trend towards collateralisd funding and trading, there wasn’t much room for Basel III liquidity buffers in the system.
Which begs an important question. To what degree did these rules, designed to make the system safer, add stress to the system by heightening what was already a material collateral crunch?
Time for Basel to think hard about what it has done.
Why debt investors are taking leave of their senses – FT Alphaville
In a brave new world, there are no benchmarks – FT Alphaville
The decline of “safe” assets – FT Alphaville
Regulators poised to soften new bank rules – FT