Regulation

OCC, FDIC propose liquidity coverage ratio standard

150px-US-FDIC-Logo.svgThe OCC and FDIC proposed a rule last week designed to strengthen the liquidity risk management of large banks and savings institutions.

The rule is substantially similar to the proposal approved by the Federal Reserve in October—the proposal is applicable to banking groups with more than $250 billion in consolidated assets, institutions with $10 billion or more in on-balance sheet foreign exposure, bank and savings subsidiaries with total assets of $10 billion or more and systemically important, non-bank institutions.

Liquidity measures how much cash or cash-equivalents and assets a company has to meet its obligations. Under the rule, covered institutions would be required to maintain a certain level of high-quality liquid assets, such as central bank reserves, government-sponsored enterprise securities and corporate debt securities that could be quickly converted to cash.

Covered institutions would be required to hold high-quality liquid assets on each business day of an amount equal to or greater than the firm’s project cash outflows, minus its projected cash inflows over a 30-day period—the ratio of the firm’s liquid assets to projected net cash outflow is known as liquidity coverage ratio.

“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,” FDIC Chairman Martin Gruenberg said. “The proposed rule acted on today 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.”

The proposal is largely based on Basel III’s LCR standard, though it is more stringent in some aspects, such as the range of assets that will qualify as high-quality liquid assets. The rule’s transition period is shorter than that of Basel’s—firms would begin the LCR transition period on January 1, 2015 and would be required to be fully compliant by 2017.

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