Proposed federal rule aims to shrink bank liquidity risk

FDIC Liquidity Risk Management

Top U.S. banking regulator Federal Deposit Insurance Corp., Office of the Comptroller of the Currency and the Federal Reserve have introduced a proposal aimed at 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 altogether be surprised by the proposal and are already largely in compliance. 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 would have to report their holdings to regulators on a quarterly basis.

Specifically, the proposal encourages banks to move away from relying on short-term funding, maintain more longer-term funds – such as customer deposits – and instead sell assets with higher levels of financial backing. This would take shape in the form of a net stable funding ratio, taking effect 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 the role that banks play in supporting economic growth,” Jeremy Newell, general counsel of The Clearing House Association, told Reuters. The group is currently in the process of determining whether this newly proposed rule would compliment or conflict with existing liquidity regulations.

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