The banking industry has been grousing for a while now about new international banking standards known as Basel III that will force them to hold more cash and safe assets as a "liquidity buffer" against future financial crises.
Why the grousing? Safe assets don't return much these days, so holding them doesn't pay very well. Banks would rather be putting their cash in riskier but higher-returning assets.
This week, bankers got something of a late Christmas present when the organization that puts together the standards, the Basel Committee on Banking Supervision, announced final Basel III rules that were much less strict than than banks expected.
The biggest news involves the aforementioned liquidity buffer, which banks can now fill up with a mix of investments that is much closer to what they hold at the present, says Steve Turner, a partner at Novantas, a financial services consulting firm.
Mortgage securities and lower-quality corporate bonds can now make up part of that buffer, although they'll receive a "haircut" that diminishes how much they'll count toward the bank's total cushion. Previous versions of the rules had called for a bigger share of essentially risk-free assets such as U.S. Treasuries.
However, there is good news for checking account holders. Consumer deposits, particularly checking deposits, are treated as among the most dependable types of capital a bank can hold, and the final version of the Basel III rules makes them even more valuable, Turner says.
"Retail deposit balances were the most valuable to begin with from an (liquidity-coverage-ratio) perspective and will continue to be highly valuable," Turner says.
That value could make banks more willing to lower bank fees and raise interest rates to attract more deposits from checking account customers.
The other big gift from Basel III was a new and relaxed timetable. Banks had complained that the rules were scheduled to take effect too quickly, creating operational and technology challenges. That timetable has been extended to give banks more time to comply, Turner says.
Originally the standards were slated to go into effect in 2015. Now they’ll be phased in gradually from 2015 to 2019.
While many Americans would probably like to see the banks squirm a little under tougher standards, they may end up benefiting from regulators' concessions, at least in the short term. With banks being forced to put less of their cash into safe assets to meet the Basel standards, they'll have more to lend to consumers in the form of car loans, mortgages and other types of loans, Turner says.
"Retail lending will benefit from the overall lowering of liquidity requirements," he says. "Decreases in requirements to set liquidity aside in investment securities will increase the available liquidity for lending of all types."
What remains to be seen is whether the softened Basel III standards will be able to perform the job they're intended to do: protect the banking system from economic downturns and prevent the next financial crisis.
What do you think? Would you trade easier lending for a less secure banking system? Do you think banks will sweeten their checking account deals to attract more deposits?
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