Regulators Finalize Liquidity Rule for Large Banks

The Federal Reserve Board, FDIC, and the Office of the Comptroller of the Currency (OCC) announced last week they have finalized a rule with regards to the "liquidity coverage ratio" (LCR) of large financial institutions.

The new rule requires affected institutions to keep high quality liquid assets on hand that the institution can easily convert into an amount of cash that is that same as or greater than the company's cash outflow less the projected cash inflow during a 30-day stress period. The LCR is the ratio of a company's liquid assets to its net cash outflow.

Affected institutions are all financial organizations with total consolidated assets worth more than $250 billion, more than $10 billion in on-balance sheet foreign exposure, or to affected organizations' subsidiary depository institutions that total more than $10 billion assets.

Banks or financial institutions that do not meet those standards but have more than $50 billion in assets will still be affected by the final rule, but will be required to abide by a less stringent, modified LCR.

Non-banks that have been designated by the Financial Stability Oversight Council for enhanced supervision will not be required to abide by the final rule; rather, enhanced prudential liquidity standards will be applied to these non-banking institutions by the Federal Reserve Board through a rule that will be subsequently issued after the company's risk profile, capital structure, and business model have been evaluated.

The final rule is nearly identical to the rule that was originally proposed with a few changes based on public comments. The Basel Committee on Banking Supervision agreed to the liquidity standard that provided the basis for the final rule. The enhanced prudential liquidity standard established by the LCR is consistent with the Consumer Protection Act and section 165 of the Dodd-Frank Wall Street Reform.

The Basel Committee rule is not as stringent as the final rule in some areas, namely in the transition period for implementation; the final rule calls for a shorter such period in order to maintain improved liquidity of those financial institutions that were established after the U.S. financial crisis.

All firms in the U.S. affected by the final rule are expected to be fully compliant by January 1, 2017.