Bank risk decreases as liquidity rule loosened

, Bloomberg

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The cost of protecting bank bonds from default has fallen to the lowest level in as much as 20 months, pushed down at the same time regulators are loosening reserve rules and measures aimed at staving off another credit seizure.

Credit-default swaps tied to six U.S. lenders from JPMorgan Chase & Co. to Wells Fargo & Co. have plummeted to an average 110.2 basis points from as high as 360 basis points in November 2011, when concern mounted that Europe's fiscal woes would spread to a contagion. The gap in relative yields between $2.2 trillion of bank bonds and debt of industrial companies is at the narrowest since December 2008, Bank of America Merrill Lynch index data show.

The overhaul of the so-called liquidity coverage ratio at a Jan. 6 meeting in Basel, Switzerland, came after officials such as European Central Bank President Mario Draghi argued the rule would choke interbank lending and make it harder to implement monetary policies. Banks will be able to choose from a longer list of approved assets, including equities and securitized mortgage debt, to build up buffers against a crisis.

"Overall, the banks have better liquidity and capital cushions than they did a few years ago," Robert Smalley, a credit strategist at UBS Securities LLC in Stamford, Connecticut, said in a telephone interview. Loosening liquidity rules "gives banks the ability to more productively deploy their balance sheet toward higher yielding assets," he said.

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