FDIC proposes rule to limit big banks' liquidity risks

Apr 26, 2016, 1:02 PM EDT
FDIC seal.
(Source: Ryan McFarland/flickr)

The FDIC has proposed a new rule to limit big banks' liquidity risks, raising the required holdings ratio from 30 days to 1 year.

Reuters reports:

The top U.S. banking regulator on Tuesday released its proposal for establishing a Net Stable Funding Ratio, a final piece in the puzzle to strengthen banks' liquidity in case they come under financial stress. The ratio is intended to ensure liquidity over a one-year horizon, compared with the liquidity coverage ratio of 2014 requiring banks to hold high-quality assets that could be readily converted into cash within 30 days. The ratio will "discourage reliance on more volatile short-term funding," the FDIC said in its proposal. "During the financial crisis, a number of large banking organizations failed, or experienced serious difficulties, in part because of severe liquidity problems," said FDIC Chairman Martin Gruenberg. "The proposed rule would reduce the vulnerability of large banking organizations to the kind of collapse in liquidity that occurred to the crisis." The proposal is in line with the international Basel standard set in 2015, according to the FDIC. It differs primarily by providing a narrower definition of a "high-quality liquid asset" and a way to address "trapped liquidity." The NSFR would apply to bank holding companies and depository institutions with $250 billion or more in total consolidated assets or $10 billion or more in foreign exposure.

Bloomberg writes:

Almost all of the covered banks currently meet the proposed requirements set to take effect in 2018, according to regulators' estimates, and the few that don't are almost at the mark. They would have to report their holdings on a quarterly basis, the regulators said. In 2007, a surge in subprime-mortgage defaults led creditors to shorten the duration on funding they offered. As the situation worsened, banks became increasingly reliant on short-term financing that became harder to obtain. To head off similar scenarios, the proposal calls on lenders to maintain more longer-term funding such as customer deposits. Harder-to-sell assets will need to be backed by higher levels of funding. "Maintaining more stable funding, such as retail deposits and term funding with maturities of greater than six months, will help avoid the spiral of fire sales of illiquid assets that deplete capital and exacerbate market stress," Fed Governor Daniel Tarullo said in 2014 after the U.S. and other global regulators agreed to a standard at the Basel Committee on Banking Supervision. The Fed has yet to vote on the U.S. plan, which is tougher than the Basel version, most notably in terms of what assets count as the most liquid. The central bank has already targeted tougher rules at the firms most reliant on short-term funding, in the form of a capital surcharge established last year.