WASHINGTON – The Federal Reserve issued a proposed rule Tuesday that would require large banks to publish quarterly reports describing how they are meeting their liquidity requirements, including what kinds of highly liquid assets they are holding.
The Nov. 24 proposed rule would have all systemically important financial institutions subject to the so-called Liquidity Coverage Ratio issue quarterly reports on what kinds of High-Quality Liquid Assets they are holding to meet the liquidity rule's requirements. The highest-quality assets could include balances held at Federal Reserve banks or foreign central bank, U.S.-backed securities and securities backed by certain foreign governments or the World Bank and International Monetary Fund.
The LCR, which was finalized by the Fed last year, requires banks with more than $50 billion of assets to hold at least enough HQLA to maintain their operations for 30 days. Different kinds of HQLA are allowed to count toward the LCR, but only in specified proportions. Lower quality HQLA are also subject to larger haircuts based on their higher risk profiles.
The proposal would have banks publicize on their websites or in regulatory filings how they are meeting the LCR based on a simple average of the level of each HQLA category held at closing each day over the quarter. The rule would also require banks to publicize their quarterly net cash outflows, retail inflows and outflows, derivatives inflows and outflows, and some other measures.
"One of the key lessons of the recent financial crisis was that market participants did not have adequate access to information about the liquidity risk profiles of large banking organizations," the proposed rule said. "Such public disclosures would facilitate transparency and help to promote market discipline by providing investors and other stakeholders with comparable information about the liquidity risk profiles of those companies."
Comments will be accepted on the proposal through Feb. 2.
The Fed has made other adjustments to the LCR since it was finalized last year. In May, the central bank allowed certain municipal bonds to qualify as a lower rung of HQLA for the purposes of LCR calculation.
The LCR is one of a handful of liquidity initiatives agreed to by the Basel Committee in order to make large banks more resilient in the face of a crisis. Another important initiative, known as Total Loss Absorbing Capacity, was introduced by the Fed late last month and would require the largest globally significant banks to also hold a certain level of long-term unsecured debt in order to jumpstart a successor bank should a bank fail.