Big Banks Need a Year’s Worth of Liquidity Under U.S. Rule

Wall Street banks will have to show their funding can withstand 12 months of economic stress under a rule issued Tuesday, even as industry lobbyists contend the demand would have exacerbated this year’s coronavirus-fueled market strains.

The final rule requires that 20 of the biggest U.S. lenders be able to rely on stable funding sources -- such as long-term debt and customers’ deposits -- in the event of a year-long liquidity drought. The measure, approved by the Federal Deposit Insurance Corp., Federal Reserve and Office of the Comptroller of the Currency could also require that some lenders gather billions of dollars more in liquid assets.

The so-called net stable funding ratio, proposed by U.S. regulators four years ago, started brewing in the aftermath of the 2008 financial crisis as a global effort agreed to by the Basel Committee on Banking Supervision. The final rule -- which takes effect on July 1 of next year -- is similar to the earlier proposal, though it gives Treasuries and cash reserves the same treatment to eliminate an incentive for banks to dump Treasuries under pressure.

The banks subjected to the rule -- including JPMorgan Chase & Co., Citigroup Inc., Bank of America Corp. and Goldman Sachs Group Inc. -- have been operating under a related requirement known as the liquidity coverage ratio, which calls for shorter-term liquidity stockpiles.

Most of the big lenders already meet the demands of the net stable funding ratio, the regulators said. The industry is more than $1 trillion above its liquidity needs, though a small number of unnamed institutions remain below their marks, according to agency officials. At least one bank needs to come up by 8%, and those with shortfalls may need as much as $31 billion more in total, according to the agencies.

The Bank Policy Institute and other industry lobbyists have long criticized the net stable funding ratio as unnecessary. A recent note from the BPI amplified that criticism, calling the effort “reckless” and arguing that it would have made it even harder for banks to contribute liquidity to Treasury markets under strain -- as they were in September and March.

FDIC Chairman Jelena McWilliams said the final rule is consistent with what was proposed in 2016, with some “improvements to the calibration.” However, board member Martin Gruenberg opposed the rule, saying it significantly weakened the earlier proposal and narrowed the scope of banks affected too severely.

Fed Governor Lael Brainard also voted against the rule, saying in a statement that it’s “not prudent” to treat Treasuries the same as cash. She said a small liquidity requirement against Treasuries is “warranted to mitigate systemic fire-sale risks and reduce the need for central bank emergency intervention at times of stress.”

Regulators also approved a final rule on Tuesday meant to limit how interconnected the largest banks can be. Lenders will be subjected to higher capital charges if they buy up another bank’s debt designed to meet requirements for total loss-absorbing capacity, according to the rule that was approved by the OCC, FDIC and Fed. That debt is meant to be used to recapitalize a lender if it fails.

©2020 Bloomberg L.P.

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