On September 3, 2014, the US federal banking regulators (the Federal Reserve Board, the Federal Deposit Insurance Corporation and the Office of Comptroller of the Currency) announced the final adoption of the liquidity coverage ratio for large financial institutions under their supervision. The liquidity coverage ratio, or LCR, requires that covered banking organizations maintain sufficient high quality liquid assets to cover cash outflows during a 30 day liquidity stress scenario that includes certain levels of deposit run-off or a reduction in wholesale funding capacity.
The Basel Committee of the Bank for International Settlements, which issues standards for bank supervision, adopted its revised LCR recommendations in 2013, and the US rule is based on that standard but is stricter in certain places, such as requiring a shorter time period to come into compliance than the Basel Committee standard (e.g., full compliance generally by January 1, 2017 rather than January 1, 2019).
The final rule includes a description of what assets will meet the “high quality liquid assets” test:
- Level 1 liquid assets are the most liquid, such as cash securities issued or unconditionally guaranteed by the US Treasury or reserves held in a non-US central bank that are not subject to restrictions on use; Level I liquid assets can represent up to 100 percent of the asset pool used to meet the LCR, but must represent at least 60 percent of the required asset pool.
- Level 2A liquid assets include certain securities issued by US government-sponsored enterprises such as Fannie Mae or Freddie Mac, but only at 85 percent of the dollar amount of the asset.
- Level 2B liquid assets include certain investment grade corporate debt and corporate equities, but only at 50 percent of the dollar amount of the asset.
The total amount of level 2A and level 2B liquid assets may not exceed 40 percent of the total asset pool; level 2B liquid assets alone may not exceed 15 percent of the total asset pool.
Commenters were concerned because US municipal securities were not eligible at any level for purposes of the LCR, and argued that generally their liquidity profile met or exceeded that of other assets that did count for purposes of the LCR. Moreover, there might be an adverse economic consequence in that banking organizations would reduce or eliminate their investments in municipal securities, which could result in economic hardship for some municipalities. While the final rule still excludes municipal securities, agency staff recommended that work be commenced on a new proposed regulation that would allow some of the most liquid US municipal securities to be included as permissible highly liquid assets.
The final rule would apply in full to banking organizations with $250 billion or more in total consolidated assets and those with $10 billion or more in total on-balance sheet foreign exposure, as well as their subsidiary banks with $10 billion or more in total consolidated assets.
A modified LCR rule will apply to top-tier bank holding companies and savings and loan holding companies with $50 billion or more in total consolidated assets that are not otherwise subject to the full rule and do not have substantial insurance or commercial operations. For organizations subject to the modified LCR rule, the minimum amount of LCR would generally be 70 percent of the full LCR requirements. Compliance would be calculated monthly, rather than each business day as required under the full LCR rule.
The provision in the proposed rule that would subject the LCR requirements to nonbank financial institutions that had been designated as of systemic risk by the Financial Stability Oversight Council was dropped. Any LCR requirement on those institutions (currently, AIG, General Electric Capital Corporation and Prudential Financial) will be imposed on a case-by-case basis.