Fed Proposes Stricter Liquidity Rules for Largest U.S. Banks

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Thursday, October 24, 2013 15.09 PM / WSJ

 

The Federal Reserve moved to strengthen the ability of the largest banks to withstand periods of market stress, pushing them to hold additional levels of safe assets to fund their operations.

 

The proposal outlined by Fed officials goes beyond international agreements, requiring the largest banks to hold enough safe assets—such as cash or those easily convertible to cash—to fund their operations for 30 days if other sources of funding aren't available.

 

The rules are intended to prevent a repeat of the 2008 financial crisis, when financial markets froze due to a lack of liquidity. The proposal would ensure banks had access to cash and other assets in times of market dislocation.

 

"Liquidity is essential to a bank's viability and central to the smooth functioning of the financial system," Fed Chairman Ben Bernanke said in prepared remarks. Fed governors are slated to vote on the staff proposal later Thursday morning.

 

The Fed proposal goes beyond those agreed to by global regulators, reflecting an ongoing concern in the U.S. that large, complex banks still pose an outsized risk to the financial system. The proposal has a narrower definition of what qualifies as a "high-quality" asset, and makes more conservative assumptions about the amount of cash needed at each bank. It also calls for U.S. banks to fully meet the new requirements by 2017, two years faster than the standard agreed to by international officials on the Basel Committee on Banking Supervision.

 

The proposal is unlikely to cause major changes at U.S. banks, which have largely improved their funding positions since the 2008 financial crisis. Most big banks are expected to be near compliance by the time the requirement goes into effect, a Fed official said Thursday. The eligible assets include government securities like U.S. Treasury bonds as well as other government bonds, corporate debt, and excess reserves held at the Fed.

 

It is just one of several requirements the Fed is considering to improve the ability of large banks to withstand market shocks. Mr. Tarullo signaled the Fed is considering some form of regulatory charge tied to bank's reliance on short-term wholesale funding, an issue he has raised repeatedly in speeches and other presentations. While the new liquidity proposal helps deal with firm-specific concerns, Mr. Tarullo said one of the central bank's highest priorities is to address market-wide liquidity risks "by forcing some internalization of the systemic costs of this form of financial intermediation."

 

The liquidity proposal, which will be open for public comment for 90 days, will not apply to all U.S. banks. Banks with less than $50 billion in assets would not be subject to the plan, while banks with more than $50 billion in assets that are not internationally active would have to meet relaxed requirements. The largest and most complex banks would be subject to the full proposal.

 

 

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