Banks will be forced to be better protected against runs than they were during the financial crisis.
The Federal Reserve and the Office of the Comptroller of the Currency voted Wednesday to implement new rules that will mandate that banks hold $100 billion more in liquid assets, a step intended to prevent banks from being caught unable to pay creditors or depositors during a panic. The Federal Deposit Insurance Corporation is expected to also finalize the regulations Wednesday afternoon.
An official at the Federal Reserve said the new measure would ensure that banks hold enough assets that “can be converted quickly and easily into cash in the amount needed” to avoid having its assets tied up when a creditor demands payment.
Federal Reserve Chairwoman Janet Yellen called the vote “another important step to enhance the safety and soundness” of big banks in the U.S.
The rule, which was proposed in November as part of the U.S. implementation of the Basel III international agreements on regulations, would require that banks hold enough safe, liquid assets at any given time to be assured of having cash to survive 30 days of a panic. Regulators described the measure as an attempt to avoid the kinds of panics that resulted in taxpayer-funded bailouts of Wall Street in 2008.
Banks can fulfill the rules by holding Treasury securities, generally viewed as the safest assets in the world. Or, they can hold an even greater number of securities backed by government agencies, such as the mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac or highly rated corporate debt or equity.
Banks and other companies in the financial industry had been wary of the rule, questioning whether the range of assets that would be considered liquid was too narrow.
If the liquidity requirement were implemented today, according to a memo prepared for the Fed, banks together would be $100 billion short of the necessary liquid assets. Nevertheless, a Fed official said that they “do not expect a significant effect on the U.S. economy or bank credit specifically” in response to the rules, because companies have been steadily building up liquidity since the recession started. The rules will not go into effect for the biggest banks until next year, and then for other banks only in 2016.
Regulators are considering adding municipal bonds to the category of assets considered safe to assuage the industry’s concerns, Fed Governor Daniel Tarullo said in prepared remarks. But they plan to move forward with the rule in the meantime.
The liquidity coverage rule is one of several major regulations regarding banks' balance sheets finalized in the past two years as part of the 2010 Dodd-Frank financial reform law or the Basel III accords. Last year, the agencies finalized risk-weighted capital requirements for banks, and this year they capped banks' leverage.