The European Central Bank (ECB) is advocating a looser standard on eligibility of assets that can be used to satisfy a draft liquidity rule from the Basel Committee on Banking Supervision, over concerns that the current definition is too restrictive on credit in the midst of the financial crisis.
Bloomberg reported Tuesday that, according to three people with knowledge of the discussions, the ECB, with the support of the Bank of France, is urging Basel rulemakers to consider allowing some asset-backed securities and loans to businesses to be eligible for inclusion in banks’ liquidity coverage ratio (LCR).
The rule, designed to forestall any repeats of the chaos that emerged in the wake of Lehman Brothers Holdings’ collapse in 2008, currently does not allow such assets to be included among the easy-to-sell holdings required to help banks get through a 30-day period of little or no credit accessibility.
However, the ECB, along with the Bank of France, are saying that such a tight definition could hinder attempts to control the eurozone crisis because it will impede lending and also make it more difficult for countries’ central banks to exercise monetary policies.
The Basel Committee, which has 27 member nations, said in 2011 that it would consider unintended consequences brought about by the draft rule, and a number of regulators are advocating changes—with the ECB and the Bank of France seeking the most drastic.