U.S. regulators unveiled a plan on Thursday for banks to hold enough assets they can easily sell to survive a credit crunch, calling on U.S. banks to meet new liquidity standards two years before most foreign banks must comply.
The proposal, which tells banks to hold enough liquid assets to meet their cash needs for 30 days, is a key plank of the Basel III capital rules agreed globally to make banks safer after the 2007-09 credit crisis.
Federal Reserve officials voted unanimously to propose U.S. rules with a shorter transition timeline than Basel calls for, and a stricter standard for how banks calculate their liquid asset needs.
"Since financial crises usually begin with a liquidity squeeze that further weakens the capital position of vulnerable firms, it is essential that we adopt liquidity regulations," Fed Governor Daniel Tarullo said at a meeting on Thursday.
Regulators said the liquidity rules would ensure that, in a crunch, banks would have enough government debt and other easy-to-sell assets on hand to cope with customer withdrawals, post collateral and meet other needs.
Banks with $250 billion or more in assets, such as JPMorgan Chase & Co and Goldman Sachs Group Inc, must meet the full requirement, while banks with less than $50 billion would be exempt. Mid-sized banks that fall in between would be subject to a less stringent liquidity requirement.
Fed staff estimated a rough shortfall of about $200 billion in liquid assets across all institutions as a result of the rule, a gap the banks would have until 2017 to address.
The international version gave banks until 2019 to fully comply because of concerns that a quick transition would hamper economic growth.
"It's clear that the other guys won't have to have that money squirreled away for several more years after our guys," said Bill Sweet, a partner with the law firm Skadden, Arps, Slate, Meagher & Flom.
Fed officials said they decided on the shorter timeframe because U.S. banks already appeared to be close to complying.
JPMorgan, Goldman Sachs, Citigroup Inc and Morgan Stanley all have said previously that they had enough liquid assets stockpiled to meet the Basel requirements. None commented specifically on the new rules.
Under the Basel rule, banks would calculate their expected obligations and hold enough liquid assets to cover net cash expenditures at the end of a 30-day period.
In a twist, the Fed's rule calls for banks to calculate liquidity ratios based on the particular day when cash outflows are the highest. That could mean U.S. banks need more liquid assets than they would under the international rule, said Oliver Ireland, a partner at the law firm Morrison Foerster who also has worked at the Fed.
"Essentially, what they've done is they've created a higher ratio," he said.
"You could have real volatility in liquidity during a period because of just cash flow issues generally, how they shape up, and so this could be a very big deal," said Ireland, who also expected banks to push back against the change.
Banks will have 90 days to submit comments after which regulators will decide whether to make the plan final. The Federal Deposit Insurance Corp and the Office of the Comptroller of the Currency are expected to propose similar rules.
U.S. government debt and excess reserves held at the Fed are deemed the most liquid under the Fed's proposal, while claims on government-sponsored enterprises, such as mortgage finance giants Fannie Mae and Freddie Mac, are less liquid and might make up only 40 percent of the buffer.
Covered bonds, private-label mortgage securities and municipal debt would not count toward the liquidity buffer, Fed staff said.7
Regulators already keep an eye on banks' liquid assets, and the Fed has proposed requiring U.S. banks to conduct liquidity stress tests. This is the first quantitative requirement governing liquid assets, Fed officials said.
International regulators also are working on a longer-term liquidity standard, the so-called net stable funding ratio, which will also be implemented in the United States.
"While this is an important step forward, there's still more work to do," said Janet Yellen, the Fed's vice chairman and President Barack Obama's choice to lead the agency next.
"There certainly remains a need to address the financial stability risks associated with short-term wholesale funding transactions," she said.
The net stable funding ratio rule has not yet been finalized by the Basel group.