The U.S. Federal Reserve unveiled a plan on Thursday that requires banks to hold enough assets they can easily sell to survive a credit crunch, a proposal it said was tougher than that demanded by international regulators.
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The plan, which will tell 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.
But Fed Governor Daniel Tarullo said the U.S. plan had a tougher transition timeline, and a stricter definition of what counts as the high-quality liquid assets the central bank will require the lenders to stock up on.
"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," Tarullo said in a speech.
Fed staff estimate 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 Fed's board adopted the proposal at a formal public meeting in a unanimous vote, and banks will now have 90 days to submit comments, which the board may take into account when it finalizes the rule.
The rule would apply in full to banks with $250 billion or more in assets, and not at all to banks with less than $50 billion in assets. The banks that fall in between would be subject to a less stringent version of the rule.
NO LONGER DRACONIAN
The banks would hold a buffer of liquid assets - such as government bonds - to draw on to ensure they can meet withdrawals by depositors, to post collateral due to credit rating downgrades and to meet other needs.
The Fed proposed implementing the rules by January 2017, well before the 2019 deadline set by the Basel committee of global bank regulators.
First drafts for the global liquidity rule were deemed draconian by the industry, but Basel gave banks four more years to meet the targets and greater flexibility in calculating the ratio in its final January plan.
On top of the new rule, the Fed has already proposed requiring U.S. banks to conduct regular stress tests to see how they would weather a crunch, Tarullo 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 America. That rule, however, has not yet been finalized by the Basel group.
The new rule does not allow banks to spread out liquidity needs over the 30-day period - as is allowed under the Basel rules - but requires them to calculate the ratio by looking at a single day with the heaviest cash needs.
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 may make up only 40 percent of the buffer.