Banks Can Go Below Basel Minimum Liquidity Levels in Crisis

January 08, 2012, 6:40 PM EST By Jim Brunsden

(Updates with accounting firm comment in fifth paragraph.)

Jan. 8 (Bloomberg) -- Banks will be allowed go below minimum liquidity levels set by global regulators during a financial crisis so that they can avoid cash-flow difficulties.

“During a period of stress, banks would be expected to use their pool of liquid assets, thereby temporarily falling below the minimum requirement,” the Basel Committee on Banking Supervision’s governing board said in a statement on its website today, following a meeting in the Swiss city.

The aim of the measure, known as a liquidity coverage ratio, is to ensure that lenders hold enough easy-to-sell assets to survive a 30-day credit squeeze. The requirement, one of several measures from the Basel group designed to prevent a repeat of the 2008 financial crisis, is scheduled to enter into force in 2015.

Banks have argued that the rule may curtail loans by forcing them to hoard cash and buy government bonds. Bank supervisors say the standard is needed to prevent a repeat of the collapses of Lehman Brothers Holdings Inc. and Dexia SA, which were blamed in part on the lenders running out of short- term funding. Global regulators said last year that they would amend the rule to address unintended consequences.

“There will be a concern nevertheless that banks won’t want to draw down their liquidity buffers because of how such a move may be received by the markets,” said Patrick Fell, a director at PricewaterhouseCoopers LLP in London. “A bank that is seen to draw on the buffer could feel itself to be weakened and compromised.”

Liquidity Buffers

Regulators must still clarify which assets banks should be allowed to count towards liquidity buffers and how much funding lenders should expect to lose in a crisis, the group said. Work on the main elements of the liquidity rule should be completed by the end of 2012, it said.

The Basel committee will provide further guidance on when lenders will be allowed to breach the minimum rule, and make sure the standard doesn’t interfere with central-bank policies.

“The aim of the liquidity coverage ratio is to ensure that banks, in normal times, have a sound funding structure and hold sufficient liquid assets,” Mervyn King, the governing board’s chairman, said. This should mean that “central banks are asked to perform only as lenders of last resort and not as lenders of first resort,” said King, who is also governor of the Bank of England.

Capital Rules

The liquidity rules were part of a package of measures adopted by global banking regulators in 2010 to strengthen the resilience of banks. The new rules also included tougher capital requirements that more than tripled the core reserves that lenders are required to hold.

Separately, the governing board said that the Basel committee will carry out “detailed” peer reviews of whether nations have correctly implemented capital rules for lenders. The assessments will include whether lenders are correctly valuing their assets, it said. The results of the reviews will be published, with the U.S, Japan and European Union the first to undergo the exams.

Some U.S. bankers, including Jamie Dimon, chief executive officer of JPMorgan, the largest U.S. lender, have called for an overhaul of the current risk-weighting plan, which allows banks to use their own models to assess the safety of assets and how much capital they need to hold. Dimon has said that the way the rules are applied could disadvantage U.S. banks.

The proportion of risk-weighted assets to total assets at European banks is half that of U.S. lenders, according to a report last year by Simon Samuels and Mike Harrison, analysts at Barclays Capital in London.

--Editors: Anthony Aarons, C. Thompson

To contact the reporter on this story: Jim Brunsden in Brussels at jbrunsden@bloomberg.net

To contact the editor responsible for this story: Anthony Aarons at aaarons@bloomberg.net

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Would Killing the Minimum Wage Help?

By Antoine Gara

Republican Presidential candidate Michele Bachmann has soft-pedaled her opposition to the minimum wage law considerably since 2005, when she was quoted as saying, at a Minnesota State Senate hearing, “Literally, if we took away the minimum wage—if conceivably it was gone—we could potentially virtually wipe out unemployment completely because we would be able to offer jobs at whatever level.” Appearing on CBS’s Face the Nation on June 26, Bachmann would say only that eliminating the minimum wage is “something that obviously Congress would have to look at” as a solution to high unemployment.

Campaign trail positioning aside, would repealing the minimum wage really make a dent in the U.S. jobless rate, which was 9.1 percent in May? While economists don’t all agree, the bulk of research points to only small potential job gains—if any—from a suspension of the minimum wage. In a 2000 survey of 308 academic economists, just under half agreed fully that the minimum wage increases unemployment among “young and unskilled workers.” The rest agreed with that statement with provisos or not at all.

In a 2009 blog post, Bachmann, a Minnesota congresswoman, cited research by David Neumark, a University of California at Irvine economist, on the job-killing effects of the minimum wage for teens and young adults. In a June 27 interview with Bloomberg Businessweek, Neumark stood by those findings. He added, however, that “the link between the federal minimum wage and employment for the lion’s share of workers is irrelevant?… It’s not even in the top 10 list of how to recover from the Great Recession.” (The Bachmann campaign did not respond to an e-mail request for comment.)

For people earning well above the minimum wage, the law matters little. According to the Bureau of Labor Statistics, of 72.9 million hourly wage earners in 2010, only 6 percent worked at or below the minimum wage. (Some hourly workers, such as casual babysitters, workers on small farms, and fishermen, are not covered by the minimum wage.)

Even for workers at the bottom, the minimum wage’s effect is not obvious. In a study of fast-food workers in New Jersey and neighboring Pennsylvania, Alan Krueger of Princeton University and David Card of the University of California at Berkeley found no statistically significant effects on employment when New Jersey raised its state minimum wage in 1992 and Pennsylvania did not. Says Krueger, who served in the Obama Administration as Assistant Treasury Secretary for economic policy in 2009-10, “I would be skeptical that eliminating the minimum wage would have a noticeable effect on employment.”

Bachmann does have some economists on her side. “Michele Bachmann’s position is not radical,” says Chris Edwards, director of tax policy at the libertarian Cato Institute. Edwards says high unemployment of teenagers in both booms and recessions is evidence that the minimum wage is above the value of their labor. Yet the main cause of unemployment today is a lack of demand, not overpriced labor, says Sylvia Allegretto, a UC Berkeley economist. Even if the minimum wage does keep some low-skilled workers out of the market, eliminating the wage floor doesn’t look like an important way to spur job growth.

The bottom line: Dropping the minimum wage could reduce unemployment among teenagers and other low-skilled laborers—a small part of the workforce.

Gara is an editorial intern for Bloomberg Businessweek.

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