Bank regulators have given the institutions they oversee more clarity, and potentially less onerous standards, regarding the liquid assets they must preserve in anticipation of a crisis. On Wednesday, the Federal Reserve Board, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency finalized a rule that, for the first time, creates a standardized minimum liquidity requirement for large and internationally active banks.
Each institution will be required to hold high quality, liquid assets (HQLA) such as central bank reserves and government and corporate debt that can be converted easily and quickly into cash in an amount equal to or greater than its projected cash outflows minus its projected cash inflows during a 30-day stress period. The ratio of the firm's liquid assets to its projected net cash outflow is its "liquidity coverage ratio," or LCR.
The new LCR will apply to all banking organizations with $250 billion or more in total consolidated assets or $10 billion or more in on-balance sheet foreign exposure and to these banking organizations' subsidiary depository institutions that have assets of $10 billion or more. The rule also will apply a less stringent, modified LCR to bank holding companies and savings and loan holding companies that do not meet these thresholds, but have $50 billion or more in total assets. Bank holding companies and savings and loan holding companies with substantial insurance or commercial operations are not covered by the final rule.
For the largest banks, the new standards will require the nation’s 30 largest banks to hold about $100 billion in highly-liquid assets, nearly half of what was originally anticipated to enable them to maintain normal cash outflows for at least 30 days during a financial crisis of credit collapse.
U.S. firms will be required to be fully compliant with the rule by Jan. 1, 2017.
The final rule offers some significant changes to an earlier proposal, including changes to the range of corporate debt and equity securities included in HQLA, a phasing-in of daily calculation requirements, a revised approach to address maturity mismatch during a 30-day period, and changes in the stress period, calculation frequency, and implementation timeline for the bank holding companies and savings and loan companies subject to the modified LCR. In a move that as angered numerous state treasurers, municipal bonds were not included among the assets that can be used to build the required liquidity bufffer.