Large and internationally active banking organisations will have to 1 January 2015 to stash away the equivalent of one month of their firms’ net outflow to meet US regulators’ final liquidity ratio rule.
Based substantially on the liquidity requirements set by the Basel Committee on Banking Supervision, the final rule will apply to banking organisations with US$250 billion or more in total consolidated assets or with more than US$10 billion of on-balance sheet foreign exposure and to these banking organisations’ subsidiary depository institutions that have US$10 billion or more.
Bank holding companies and savings and loan holding companies that do not meet thresholds but have US$50 billion or more in assets will face a less stringent liquidity recovery coverage ratio, or LCR.
However, banking holding companies and savings and loan holding companies that have substantial insurance or commercial operations will not be covered by the final rule. The rules also will not cover the non-bank financial companies designated by the US Department of the Treasury’s Financial Stability Oversight Council. For the non-bank financial companies, the Federal Reserve plans to apply enhanced prudential liquidity standards after the US central bank evaluates each institution’s business model, capital structure and risk profile.
Under the final rule, the affected organisations will need to hold high-quality liquid assets (HQLAs) in an amount equal or greater than their projected net cash outflows during a 30-calendar-day stress period.
The regulators – the Federal Reserve, the Federal Deposit Insurance Corp., and the Office of the Comptroller of the Currency – define HQLAs as “central bank reserves and government and corporate debt that can converted easily and quickly into cash”.
The new rule divides HQLAs into three categories. Level 1 securities will be the highest quality and most liquid assets that can be used without limit to meet HQLA threshold demands without a haircut. Level 2A and Level 2B securities will be stable and liquid securities, but not to the same extent as Level 1 assets. Level 2A assets cannot contribute more than 40% to meeting a firm’s HQLA threshold and will be subject to a 15% haircut. Level 2B securities cannot contribute more than 15% to meeting a firm’s HQLA threshold and will be subject to a 50% haircut.
Except for a few changes like the introduction of a daily calculation requirement, a revised approach to addressing maturity mismatches during the 30-day period and implementation timeline, the final rules mirror the original proposed version.