Racehorses in Running as Regulators Debate Loose Liquidity Rules

By Ben Moshinsky & Jim Brunsden

As regulators sparred last month over international liquidity rules in Basel, Switzerland, one suggested racehorses could be used as collateral to access cheap cash at central banks in a crisis. While the remark was said in jest, it highlights the split between regulators over how low to set the bar for the types of assets banks must hold to protect against funding shocks, according to a government official familiar with the talks who asked not to be identified because the negotiations were confidential. The December meeting of regulators didn’t yield a final deal on the so-called liquidity coverage ratio. Racehorses may be an extreme example of how low the bar can go, but the ECB has in the past accepted low-rated Greek and Portuguese sovereign bonds, as well as securities backed by car loans, as collateral for funding in times of crisis. “It’s about whether you want the central bank really to be the lender of last resort or as much a part of day-to-day operations as core depositors,” Karen Shaw Petrou, managing partner of Washington-based Federal Financial Analytics Inc., said in an e-mail. “In this question lies the difference between banks as quasi-agents of the state or private companies.”