World Crisis Online

George Osborne is looking at ways in which Britain’s tough bank liquidity rules might be eased, potentially saving banks hundreds of millions of pounds and releasing funds for lending to businesses and homeowners.

The chancellor is said to be looking sympathetically at claims by the banks that Britain’s regulators have gone too far in their efforts to avoid another Lehman Brothers-style crisis and have put the City at an international disadvantage.

“The chancellor thinks there may be something in this,” said one Treasury official. Nick Clegg, deputy prime minister, and Vince Cable, business secretary agree.

The banks stepped up their demands for a looser liquidity regime as they pressed for a “level playing field” in the protracted peace talks, labelled Project Merlin, between the Treasury and the Square Mile.

Barclays said this week that funding its liquidity buffer, up 21 per cent to £154bn, had cost it £900m last year.

Bank shares rose on Thursday on hopes liquidity rules would be relaxed. Barclays rose 1.5 per cent to 337p, while Lloyds Banking Group shares were up 2.8 per cent at 69.05p. Royal Bank of Scotland Group, which also owns Natwest, jumped 3.8 per cent to 49p.

Although the Financial Services Authority, which sets liquidity requirements, is independent of government, the Treasury is involved in policy co-ordination. Mr Osborne is also negotiating the implementation of the European Union’s new liquidity rules, under the Basel III deal.

As part of those reforms, global banking regulators agreed in December that all banks would be required to hold a stock of easy-to-sell assets equal to their potential losses during a 30-day market crisis. That global rule is not mandatory until 2015.

Banks say that FSA supervisors are pressing them to hold more cash and government bonds than competitors abroad, and to do so sooner. “If we have to hold large portfolios of gilts, we can’t deploy the assets in other ways,” said Simon Hills of the British Bankers’ Association.