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Federal Reserve Board Proposes Liquidity Standards for Large Banks

Fed buildingThe Federal Reserve Board proposed a new rule in October aimed at improving the liquidity position of large financial institutions.

One size not intended to fit all
The minimum liquidity coverage ratio (LCR)—the measure of a firm's liquid assets to its projected net cash outflow—would apply to large, internationally active banking organizations and to systemically important, nonbank financial firms. Banks with at least $50 billion in total assets that are not internationally active would fall under a less stringent, modified version of the liquidity standards. Smaller banks and other nonbank financial companies, such as insurance companies, are not covered by the proposed rule.

"Liquidity is essential to a bank's viability and central to the smooth functioning of the financial system," Fed Chairman Ben Bernanke said during an open meeting to discuss the proposal. "The proposed rule would, for the first time in the United States, put in place a quantitative liquidity requirement that would foster a more resilient and safer financial system in conjunction with other reforms."

The proposal would implement the Basel III liquidity standards in the United States, but it is more stringent in some areas. For example, a narrower range of assets will qualify as high-quality, liquid assets; the proposed two-year transition period is shorter than that under the Basel agreement.

Moves made to complement previous enhancements
"Since financial crises usually begin with a liquidity squeeze that further weakens the capital positions of vulnerable firms, it is essential that we adopt liquidity regulations to complement the stronger capital requirements, stress testing, and other enhancements to the regulatory system we have been putting in place over the past several years," Fed Governor Daniel Tarullo said.

Banks will have until January 1, 2017, to be fully compliant with the new rule, which means having a liquidity coverage ratio of 100 percent.

The proposal, on which the Fed collaborated with the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency, will be open for comment until January 31, 2014.

October 30, 2013


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