Proposed federal rule aims to shrink bank liquidity risk

FDIC Liquidity Risk Management

Top U.S. banking regulators Federal Deposit Insurance Corp., Office of the Comptroller of the Currency, and the Federal Reserve have proposed reducing bank reliance on “assets, derivatives, and off-balance-sheet activities,” representing significant liquidity risks for larger banks. The goal is to strengthen liquidity and make banks more resistant to financial stress and market downturns.

“The proposal encourages banks to move away from short term funding.”

“During the financial crisis, a number of large banking organizations failed, or experienced serious difficulties, in part because of severe liquidity problems,” Reuters quotes FDIC Chairman Martin Gruenberg as saying. “The proposed rule would reduce the vulnerability of large banking organizations to the kind of collapse in liquidity that occurred to the crisis.”

Most banks would not be surprised by the proposal and are already largely compliant. The plan, as proposed, will apply to 15 banks with more than $250 billion in assets or more than $10 billion in foreign exposures, as well as a modified, less-stringent version of the plan which would apply to 20 firms above $50 billion. In both cases, firms must report their holdings to regulators every quarter.

Specifically, the proposal encourages banks to move away from relying on short-term funding, maintain longer-term funds – such as customer deposits – and instead sell assets with higher levels of financial backing. This would take shape as a net stable funding ratio, taking effect on Jan. 1, 2018.

“Harmonization is key, as there are already very real concerns about whether the cumulative effect of these rules is unduly restricting the maturity transformation that is essential to banks’ role in supporting economic growth,” Jeremy Newell, general counsel of The Clearing House Association, told Reuters. The group is determining whether this newly proposed rule would complement or conflict with existing liquidity regulations.

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