Basel meet to seek liquidity deal

Global banking regulators will seek agreements on liquidity and the quality of capital to fill gaps in an overhaul of rules endorsed by world leaders, according to two people familiar with the discussions.

Regulators may fail to agree on all the details at a two-day meeting of the Basel Committee on Banking Supervision starting tomorrow, said the people, who declined to be identified because the talks are private. That’s because of their potentially large effect on national banking industries, one of the people said.

The Basel committee will also discuss how bondholders may contribute to the costs of saving banks on the verge of collapse and what should trigger such burden sharing, the people said.

The Group of 20 nations decided to bolster banks’ liquidity and capital to prevent a rerun of the worst financial crisis since the Great Depression. An exodus of deposits from Irish lenders caused a funding shortfall which led European governments and the International Monetary Fund yesterday to agree on an ¤85 billion ($113 billion) aid package for the country.

The G-20 this month endorsed rules, known as Basel III, which will more than triple the highest-quality capital, such as shareholders’ equity, that banks must hold to cushion against losses. The leaders left it to regulators to complete the details of the new rules. The G-20 has called on the committee to agree them before the end of this year.

‘Balanced decisions’ The Basel committee should “come to balanced decisions” on banks’ liquidity and capital that “do not risk hampering their lending capacity,” the European Banking Federation said in an e-mailed statement.

The Basel group is evaluating the merits of other measures to protect lenders in times of stress. These include the use of so-called contingent convertible bonds, which convert to equity if certain triggers, such as preset capital levels, are breached.

Regulators plan to complete this work by mid-2011, the committee said in a statement last month.

A Swiss government-appointed panel recommended last month that Zurich-based UBS AG and Credit Suisse Group AG should hold as much as 9 per cent of their risk-weighted capital in these so-called CoCo bonds by 2019.

The Basel committee suggested in August that regulators should have the option of writing off the subordinated debt and preferential shares of a bank that is about to fail, or of converting such instruments into common shares.

The Basel meeting will also discuss criteria to identify banks that are deemed to be too big to fail. Regulators are aiming to complete work on “provisional” criteria to assess “the systemic importance of financial institutions at the global level,” by the end of this year, the committee said last month.