OCC and FDIC Propose Rule to Strengthen Liquidity Risk Management
| Date Published | 10/30/2013 |
| Author | Marja Hoek-Smit |
| Theme | Housing Finance Policy |
| Country | United States |
OCC
and FDIC Propose Rule to Strengthen Liquidity Risk Management
October
30, 2013
The Office of the Comptroller of the
Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) proposed a
rule on Wednesday to strengthen the liquidity risk management of large banks
and savings associations.
The OCC and FDIC’s proposed liquidity rule is substantively the same as the
proposal approved by the Board of Governors of the Federal Reserve System on
October 24, 2013. That proposal, which was developed collaboratively by
the three agencies, is applicable to banking organizations with $250 billion or
more in total consolidated assets; banking organizations with $10 billion or
more in on-balance sheet foreign exposure; systemically important, nonbank financial
institutions that do not have substantial insurance subsidiaries or substantial
insurance operations; and bank and savings association subsidiaries thereof
that have total consolidated assets of $10 billion or more (covered
institutions). The proposed rule does not apply to community banks.
Liquidity generally is a measure of
how much cash or cash-equivalents and highly marketable assets a company has on
hand to meet its obligations. Under the proposed rule, covered institutions
would be required to maintain a standard level of high-quality liquid assets
such as central bank reserves, government and Government Sponsored Enterprise
securities, and corporate debt securities that can be converted easily and
quickly into cash. Under the proposal, a covered institution would be required
to hold such high-quality liquid assets on each business day in an amount equal
to or greater than its projected cash outflows less its projected cash inflows
over a 30-day period. The ratio of the firm's high-quality liquid assets to its
projected net cash outflow is specified as a "liquidity coverage
ratio," or LCR, by the proposal.
“We learned during the financial
crisis just how important liquidity is to the stability of the system as a
whole, as well as for individual banks,” said Comptroller of the Currency
Thomas J. Curry. “A number of large institutions, including some with
sufficient levels of capital, encountered difficulties because they did not
have adequate liquidity, and the resulting stress on the international banking
system resulted in extraordinary government actions both globally and at home.
The proposed liquidity rule will help ensure that a bank’s cash, and not
taxpayer money, is the first line of defense if it faces a short-term funding
stress."
“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. 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,” said FDIC Chairman Martin J. Gruenberg.
The liquidity proposal is based on a
standard agreed to by the Basel Committee on Banking Supervision. The proposed
rule is generally consistent with the Basel Committee's LCR standard, but is
more stringent in some respects such as the range of assets that will qualify
as high-quality liquid assets and the assumed rate of outflows of certain types
of funding. In addition, the proposed rule’s transition period is shorter than
that included in the Basel framework. The accelerated transition period
reflects a desire to maintain the improved liquidity positions that U.S.
institutions have established since the financial crisis. Under the
proposal, U.S. firms would begin the LCR transition period on January 1, 2015,
and would be required to be fully compliant by January 1, 2017.
For full proposal.