Regulators modify liquidity coverage ratio requirements

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WASHINGTON — Bank regulators issued a rule Tuesday modifying the liquidity coverage ratio to better enable banks to participate in two of the Federal Reserve’s lending facilities and “support the flow of credit to households and businesses.”

The rule is aimed at banks using the Fed’s Money Market Mutual Fund Liquidity Facility and the Paycheck Protection Program Liquidity Facility, part of the central bank's response to the economic fallout from the coronavirus pandemic.

“The interim final rule facilitates participation in these facilities by neutralizing the LCR impact associated with the non-recourse funding provided by these facilities,” the Federal Deposit Insurance Corp., Office of the Comptroller of the Currency and Federal Reserve said in a statement. “The rule does not otherwise alter the LCR or its calibration.”

The interim rule will go into effect 30 days after being published in the Federal Register.

The LCR is meant to ensure a bank has enough high-quality liquid assets to cover 30 days of net cash outflows. Without the interim rule, regulators wrote, changes in cash flow tied to either the PPP or MMF lending facilities could “potentially result in an inconsistent, unpredictable, and more volatile calculation of LCR requirements across covered companies.”

Given how inflow and outflow rates are typically calculated for the LCR, the agencies said sudden surges in cash from the Fed's lending facilities “could unnecessarily contribute to volatility in LCRs.”

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