Risk Management

Fed Passes Revised Liquidity Rule for Big Banks

After a long wait, federal regulators vote to require banks to hold enough liquid assets to cover their net cash outflows for one month.
Iris DorbianSeptember 3, 2014
Fed Passes Revised Liquidity Rule for Big Banks

The liquidity coverage ratio, designed to prevent the cash squeeze that brought some banks to their knees during the financial crisis, is finally here.

liquidityThe Federal Reserve and the Office of the Comptroller of the Currency voted Wednesday to force big banks to hold enough liquid assets, such as Treasury bills, to fund themselves for a 30-day period in a crisis.

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Although U.S. regulators tweaked the rules at the eleventh hour to make them easier on large banks, “the Federal Reserve said big U.S. banks would need to hold a total of about $2.5 trillion in highly liquid assets by 2017, and that they would have a shortfall of about $100 billion if that threshold applied today,” reported Reuters.

The final rule eased up on several elements of the original proposed version, which first appeared in October 2013. The earlier draft of the rule, for example, said that banks with between $50 billion and $250 billion in assets would have to calculate their liquidity ratio every day; but that timeline got revised to a monthly basis in the final draft, says the Wall Street Journal. Banks that fit this criteria will have to start complying with the new rule on January 1, 2016.

Banks that have more than $250 billion assets will have to start meeting the guidelines next January, says the WSJ “but will have until July 2015 before they must calculate the liquidity ratio on a daily basis.”

Another issue that arose in the liquidity coverge ratio’s first version and was changed was the treatment of public-sector deposits. The change was slanted toward large regional banks, “which had worried the original version would penalize them for holding such deposits on behalf of towns or counties,” says the WSJ.

The final liquidity coverage ratio rule also exempted systemically important financial companies that are not banks but are regulated by the Federal Reserve.

One contentious element that did not get changed was the rule’s treatment of municipal bonds, which are not deemed safe liquid assets under the rule. A Federal Reserve Board member said the Fed could revise the treatment of such bond holdings in the future.

The Federal Deposit Insurance Corp is also expected to vote on the new liquidity rule on Wednesday.

After the FDIC’s vote, both the Federal Reserve and the FDIC are “expected to make final tweaks to the so-called leverage ratio, a capital requirement applying to the biggest banks,” reports the WSJ.

Sources: U.S. Fed adopts final liquidity rules for big banks, U.S. Regulators Tweak Final Liquidity Rule for Large Banks

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