Liquidity Coverage Ratio: Final Rule

The Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the Board of Governors of the Federal Reserve System (the agencies) are issuing a final rule that implements a quantitative liquidity requirement consistent with the liquidity coverage ratio (LCR) established by the Basel Committee on Banking Supervision. The requirement is designed to improve the liquidity risk profile of international banking organizations and to strengthen the measurement and management of liquidity risk.

Statement of Applicability to Institutions with Total Assets Under $1 Billion: This Financial Institution Letter is not applicable to depository institutions with total assets of less than $1 billion.

The final rule:

  • Establishes a quantitative requirement of liquid assets (liquidity buffer) that covered companies must hold to meet a defined level of liquidity stress.
  • Provides a method to measure liquidity stress by applying a series of shocks, with prescribed run-off and inflow rates, against a bank’s assets, obligations, and other funding sources.
  • Requires at least 60 percent of the liquidity buffer of covered companies to consist of the most liquid assets (Level 1 liquid assets).
  • Provides enhanced information about liquidity risk to managers and supervisors, allowing for more effective oversight and supervision of liquidity risk and appropriate supervisory responses.
  • Requires covered companies to notify their primary federal regulator when the LCR drops below 100 percent and develop a remediation plan if the shortfall persists.
  • Establishes a phase-in period, requiring covered companies to comply with a minimum LCR of 80 percent as of January 1, 2015; 90 percent as of January 1, 2016; and 100 percent thereafter.

The Liquidity coverage ratio is designed to ensure that financial institutions have the necessary assets on hand to ride out short-term liquidity disruptions. Banks are required to hold an amount of highly-liquid assets, such as cash or Treasury bonds, equal to or greater than their net cash over a 30 day period (having at least 100% coverage). Due to the fact that banks are required to hold a certain level of highly-liquid assets, they are less able to lend out short-term debt.

Link to final rule: https://www.fdic.gov/news/news/financial/2014/fil14046.html