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Final liquidity rules issued for biggest US banks
Final liquidity rules issued for biggest US banks
September 4, 2014
US regulators, including the Federal Reserve, have finalised the country's first standardised minimum liquidity requirement for the country's biggest banks. The liquidity coverage ratio (LCR) the ratio of a firm's liquid assets to its projected net cash outflow will apply to US banks with $250 billion in consolidated assets or $10 billion in on-balance sheet foreign exposure from January 1, 2017, the Fed said yesterday. It also covers subsidiaries with $10 billion in assets, while a "less stringent" LCR will apply to banks with total assets of $50 billion. Foreign banks operating in the US are exempt from the rule. "This rule will apply only to domestic bank holding companies," said Daniel Tarullo, a Fed governor, although he hinted at a "future rule-making" covering US intermediate holding companies and branches of large foreign banks. The LCR requires large financial institutions to hold high-quality liquid assets (HQLA) that can be quickly converted into enough cash to cover net outflows during a 30-day period. The final rule, which was also approved by the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency, is based on the Basel Committee standard but is more stringent in certain areas, including a shorter transition period for implementation, the Fed said. "The accelerated transition period reflects a desire to maintain the improved liquidity positions that US institutions have established since the financial crisis," it added. Moreover, changes have been made to the range of corporate debt and equity securities included in HQLA, while daily calculation requirements will be introduced "in response to public comments". Tarullo described the new LCR rule as a "response to the fact that liquidity squeezes were the agents of contagion in the financial crisis". Janet Yellen, the Fed's chair, added that most big US banks used "excessive" amounts of short-term wholesale funds at the time "and did not hold a sufficient amount of high quality liquid assets" to withstand market stress.
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