Alert October 29, 2013

FRB, OCC and FDIC Issue Proposed Rule Concerning a Minimum Liquidity Coverage Ratio and Liquidity Risk Management, Standards and Monitoring

The FRB, OCC and FDIC (the “Agencies”) jointly issued a notice of proposed rulemaking (the “Proposed Rule”) that would establish a minimum liquidity coverage ratio (the “LCR”) for banking organizations with $250 billion or more in total assets or $10 billion or more in on-balance sheet foreign exposure and for such organizations’ subsidiary depository institutions with $10 billion or more in total consolidated assets (collectively, “Covered Banking Organizations”).  The Proposed Rule would also apply to nonbanking companies that have been designated by the Financial Stability Oversight Council for supervision by the FRB because they are “systemically important financial institutions” that do not have significant insurance operations and to any depository institution subsidiaries with $10 billion or more of consolidated assets of such nonbanking companies.  The Proposed Rule, however, would not apply to banking organizations that have opted-in to the advanced approaches rule.  The Agencies noted that the Proposed Rule is generally consistent with the Basel Committee’s LCR standard “but is more stringent in certain areas.”

Under the Proposed Rule, a Covered Banking Organization is required to hold high quality liquid assets (“HQLAs”) in an amount equal to or greater than its projected cash outflows minus its projected cash inflows during a short-term stress period. For Covered Banking Organizations, the LCR standard is based on a 30-calendar day stress scenario.  Qualifying HQLAs include assets such as central bank reserves, government debt and corporate debt.  In its release accompanying the Proposed Rule, the FRB noted that the Proposed Rule “specifies how a firm’s projected net cash outflows over the stress period would be calculated using common, standardized assumptions about the outflows and inflows associated with specific liabilities, assets, and off-balance-sheet obligations.”

The FRB is also proposing on its own to implement a modified, less stringent  version of the LCR as an enhanced prudential standard for bank holding companies and savings and loan holding companies without significant insurance or commercial operations that have $50 billion or more in total assets, but are not otherwise covered under the Proposed Rule.  This LCR standard set by the FRB for smaller Covered Banking Organizations (“Smaller Covered Banking Organizations”) would be based on a 21-calendar day (rather than a 30-calendar day) stress scenario.

In addition, the Agencies have reserved the right under the Proposed Rule to apply the LCR to a company not otherwise covered because of the company’s asset size, level of complexity, risk profile, scope of operations, and affiliation with foreign or domestic covered companies or the risk they pose to the financial system.  Banking organizations with less than $50 billion in consolidated assets are not subject to the Proposed Rule.  Covered Banking Organizations (including Smaller Covered Banking Organizations) are required to be in 80% compliance with the Proposed Rule by January 1, 2015 and in full compliance with the Proposed Rule by January 1, 2017.  Comments on the Proposed Rule are due by January 31, 2014.