FDIC and OCC propose new liquidity regulations
The FDIC and the Office of the Comptroller of the Currency (OCC) recently proposed additional regulations aimed at improving the liquidity risk management of large financial institutions. The proposed regulations are materially the same as those passed by the Fed late last month and applies to
• Banks with $250 billion or more in total consolidated assets
• Banking organizations with $10 billion or more in on-balance sheet foreign exposure
• Systemically important, non-bank financial institutions that do not have substantial insurance subsidiaries or substantial insurance operations;
• Bank and savings association subsidiaries thereof that have total consolidated assets of $10 billion or more (covered institutions).
Under this rule and Fed’s proposal, community banks would not be affected.
“The recent financial crisis demonstrated that liquidity risk can have significant consequences to large banking organizations with effects that spill over into the financial system as a whole and the broader economy. The proposed rule…would establish first quantitative liquidity requirement applied by federal banking agencies and is an important step in helping to bolster the resilience of large internationally active banking organizations during periods of financial stress,” said FDIC Chairman Martin J. Gruenberg.
Liquidity measures the cash and cash-equivalents a company has in reserve to meet obligations when they fall due. As a result of the new regulation, applicable banks would have to keep new levels of quality liquid assets that can be easily converted into cash. Institutions would be required to have on hand, on any business day, the sum of projected cash outflows minus projected cash inflows over the next 30 days. The ratio of high-quality liquid assets to its projected net cash outflow is designated as “liquidity coverage ratio,” or LCR.
“We learned during the financial crisis just how important liquidity is to the stability of the system as a whole, as well as for individual banks,” said Comptroller of the Currency Thomas J. Curry. “A number of large institutions, including some with sufficient levels of capital, encountered difficulties because they did not have adequate liquidity, and the resulting stress on the international banking system resulted in extraordinary government actions both globally and at home. The proposed liquidity rule will help ensure that a bank’s cash, and not tax-payer money, is the first line of defense if it faces a short-term funding stress.”
This proposal was created based on international standards set by the Basel Committee on Banking Supervision. While the proposed regulation follows the Committee’s LCR standard, it is in some ways more rigorous and operates under an accelerated transition period than as is laid out by Basel. Since the 2008 financial crisis, financial institutions in the United States have improved their liquidity positions, and the accelerated timeframe and more stringent regulations are reflective of the desire to continue to hold these improved positions. As laid out by the new proposal, the LCR transition period would commence on January 1, 2015, and be realized by January 1, 2017.
The Basel pronouncements might have some bankers concerned with capital levels, especially capital levels during stressed scenarios, an exercise that most OCC, FDIC and Fed-regulated banks are being asked to complete. For more information about capital adequacy and stress testing, download How Regulators Gauge Capital Adequacy Under Stress.
