Cheat Sheet: What's in Regulators' Long-Term Liquidity Proposal

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WASHINGTON — Federal regulators released a liquidity proposal Tuesday that would require the largest and most systemically risky U.S. banks to ensure they have access to stable funding for at least a year.

The long-awaited plan is a companion to an earlier rule finalized in 2014 that requires banks to maintain enough high-quality liquid assets to withstand a 30-day crisis. Together, the two proposals are meant to reduce big banks' reliance on short-term funding that can be disrupted during an economic downturn.

The latest proposal, known as the net stable funding ratio, details what regulators consider appropriate sources of stable funding, including long-term debt, Tier 1 capital and core deposits.

"The proposed [NSFR] would ensure that lending and investing activities of large banking organizations are sufficiently supported by sources of stable funding over a one-year horizon," said Federal Deposit Insurance Corp. Chairman Martin Gruenberg in prepared remarks for a meeting Tuesday to discuss the plan. "Maintaining sufficient amounts of stable funding strengthens a banks liquidity profile by reducing the risk of funding disruptions."

Comptroller of the Currency Thomas Curry echoed that statement, saying that the proposal "is one piece of a broader effort to increase the resiliency of the banking system and complements the liquidity rule, the agencies' enhanced capital standards, and the OCC's robust bank supervision."

The plan would apply to banks with more than $250 billion in assets and more than $10 billion in foreign exposure — U.S. regulators' definition of "advanced approaches" bank holding companies. The rule separately lays out a "less stringent" standard for banks with between $50 billion and $250 billion in assets.

The plan largely adopts the international Basel Committee's proposed net stable funding ratio framework published in October 2014. Like the Basel plan, the U.S. version weights funding sources in order to account for the potential for rapid withdrawal.

Certain assets, including a bank's own Tier 1 regulatory capital and Tier 2 capital with maturity of more than a year, would be considered 100% "available stable funding." Stable retail deposits, meanwhile, would be assigned a 95% ASF factor, in part because deposit insurance makes the potential for a run unlikely over the proposed one-year time horizon. Deposits that are neither stable retail deposits nor retail brokered deposits would be assigned a lesserASF, 90%.

At the lower end of the scale, unsecured wholesale funding and certain secured funding transactions with at least six months but less than one year maturity — including funding from central banks — would be assigned a 50% ASF. This is to "discourage potential overreliance on funding from central banks, consistent with the proposed rule's focus on stable funding raised from market sources," according to the proposal.

Securities with a maturity of between six months and one year would also be assigned a 50% ASF, as are operational deposits and retail brokered deposits lacking certain stabilizing factors (including total deposit insurance coverage).

Trade-date payables, certain short-term brokered deposits, nondeposit retail funding, short-term funding from financial sector entities or central banks with less than six months maturity are all assigned a 0% ASF under the proposal.

The proposal will be open for public comment through July 29, and the effective date of the rule would be Jan. 1, 2018. The plan was expected to be approved for release by the FDIC board at its meeting on Tuesday and separately by the Office of the Comptroller of the Currency shortly thereafter. The Federal Reserve Board is set to consider the plan at its planned May 3 meeting.

All bank holding companies with more than $50 billion in assets would have to disclose their net stable funding ratio compliance on a quarterly basis, including a qualitative discussion of the various funding sources that comprise the holding company's stable funding. However, banks with less than $250 billion in assets would only have to file those disclosures at the holding company level rather than by individual bank.

The proposal estimates that 15 depository institution holding companies would be subject to the NSFR, with another 20 depository institutions holding companies subject to the Fed's modified NSFR rule for smaller firms. The proposal notes that "nearly all of these companies would be in compliance with the proposed NSFR or modified NSFR requirement if those requirements were in effect today," and the aggregate shortfall totals $39 billion.

The net stable funding ratio is part of a package of rules released by the Basel Committee designed to prevent a repeat of the financial crisis, including rules establishing the liquidity coverage ratio, NSFR, total loss-absorbing capacity and a G-SIB capital surcharge.

Banks have always sought to manage their liquid assets as efficiently as possible in order to maximize asset performance — a phenomenon known as maturity transformation. But leading up to and during the crisis, banks and other financial institutions were not only highly leveraged but highly reliant on short-term wholesale funding — that is, very short-term cash loans — to meet their liquidity obligations.

In the early phases of the crisis, that short-term wholesale funding market dried up rapidly, leaving many banks in positions of having to rapidly sell less-liquid assets at a steep discount in order to meet their obligations — a condition that further compounded financial instability — even though they met existing capital standards.

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