By Dow Jones Business News, October 24, 2013, 09:55:00 AM EDT
By Ryan Tracy and Michael R. Crittenden
WASHINGTON--The Federal Reserve moved Thursday to strengthen the ability of the largest banks to withstand periods of
market stress, pushing them to hold additional levels of safe assets to fund their operations.
The proposal outlined by Fed officials goes beyond international agreements, requiring the largest banks to hold
enough safe assets--such as cash or those easily convertible to cash--to fund their operations for 30 days if other
sources of funding aren't available. The rules are intended to prevent a repeat of the 2008 financial crisis, when
financial markets froze due to a lack of liquidity. The proposal would ensure banks had access to cash and other assets
in times of market dislocation.
"Liquidity is essential to a bank's viability and central to the smooth functioning of the financial system," Fed
Chairman Ben Bernanke said in prepared remarks. Fed governors are slated to vote on the staff proposal later Thursday
The Fed proposal goes beyond those agreed to by global regulators, reflecting an ongoing concern in the U.S. that
large, complex banks still pose an outsized risk to the financial system. The proposal has a narrower definition of what
qualifies as a "high-quality" asset, and makes more conservative assumptions about the amount of cash needed at each
bank. It also calls for U.S. banks to fully meet the new requirements by 2017, two years earlier than the standard
agreed to by international officials on the Basel Committee on Banking Supervision.
"This rule would help ensure that the liquidity positions of our banking firms do not weaken as memories of the crisis
fade," Fed Gov. Daniel Tarullo said in prepared remarks.
The proposal is unlikely to cause major changes at U.S. banks, which have largely improved their funding positions
since the 2008 financial crisis. Most big banks are expected to be near compliance by the time the requirement goes into
effect, a Fed official said Thursday. The eligible assets include government securities like U.S. Treasury bonds as well
as other government bonds, corporate debt, and excess reserves held at the Fed.
It is just one of several requirements the Fed is considering to improve the ability of large banks to withstand
market shocks. Mr. Tarullo signaled the Fed is considering some form of regulatory charge tied to bank's reliance on
short-term wholesale funding, an issue he has raised repeatedly in speeches and other presentations. While the new
liquidity proposal helps deal with firm-specific concerns, Mr. Tarullo said one of the central bank's highest priorities
is to address market-wide liquidity risks "by forcing some internalization of the systemic costs of this form of
The liquidity proposal, which will be open for public comment for 90 days, will not apply to all U.S. banks. Banks
with less than $50 billion in assets would not be subject to the plan, while banks with more than $50 billion in assets
that are not internationally active would have to meet relaxed requirements. The largest and most complex banks would be
subject to the full proposal.
The Fed also said in a staff memo that firms with substantial insurance operations that have been designated as "
systemically important" by U.S. regulators would not be subject to the proposal. American International Group Inc. ( AIG )
and Prudential Financial Inc. (PRU) were the first two insurance firms to receive that designation from the Financial
Stability Oversight Council earlier this year. A Fed official said the regulator could propose a separate rule for
insurance companies in the future. Lawmakers have expressed concern about applying tougher bank standards to insurers.
Under the proposal, the Fed wants banks to be holding enough assets to meet 80% of the so-called "liquidity coverage
ratio" by Jan. 1, 2015, and to fully implement the requirement by 2017. That's a faster timeline than outlined in Basel,
which wouldn't require banks to meet the full requirement until 2019.
The impact of liquidity requirements on a bank can vary depending on a number of factors, including the way the bank
obtains funding, said Bill Sweet, head of the financial institutions regulation group at Skadden, Arps, Slate, Meagher,
and Flom LLP. For banks that rely on short-term borrowing to fund their operations, such requirements could force them
to keep more safe assets on hand that could serve as sources of cash if the short-term funding sources dried up, Mr.
Sweet said. For banks that rely more on traditional deposits, the requirement may be less onerous.
Mr. Tarullo also signaled that the Fed is considering some form of regulatory charge tied to bank's reliance on short-
term wholesale funding, an issue he has raised repeatedly in speeches and other presentations. While the new liquidity
proposal helps deal with firm-specific concerns, Mr. Tarullo said one of the central bank's highest priorities is to
address market-wide liquidity risks "by forcing some internalization of the systemic costs of this form of financial
(END) Dow Jones Newswires
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