In an attempt to prevent future liquidity issues similar to those that occurred during the financial crisis of 2008, the Federal Reserve System—together with the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation—has proposed a minimum liquidity requirement on large and international banks with over $250 billion in assets or $10 billion or more in on-balance sheet foreign exposure. Pursuant to this requirement, the banks must hold high quality liquid assets (HQLAs) that are easily convertible into cash. Each bank shall be obligated to maintain a liquidity coverage ratio of 1-to-1 on the day with the highest projected net cash outflows during each 30-day stress period. In other words, the bank is required to hold enough HQLAs to cover its projected cash outflows minus its projected cash inflows on the most expensive day within the 30-day period. Additionally, a modified (light) version of the US LCR Proposal shall apply to specific domestic non-banking financial companies that hold assets in excess of $50 billion but less than $250 billion.
Moreover, while the proposed US liquidity coverage ratio (US LCR) is largely consistent with the LCR standard promulgated by the Basel Committee on Banking Supervision (Basel LCR), on closer scrutiny it is clear that the US LCR is more stringent than the latter in significant aspects. The three key differences, besides the existence of two versions of the US LCR versus the single version under Basel LCR, between the two are: the period of transition and implementation of the LCR standard, the assets included within the definition of HQLAs and the method employed to assess each bank’s compliance during the stress test period.
Even though the proposal is noticeably tougher than the Basel LCR, many commentators, such as Federal Reserve Chairman, Ben Bernanke, praise the security that the new proposal provides. Others, however, have pointed to the cost of this security, including Stefan Walter who believes that credit will be more expensive after the implementation of this proposal. This is something to keep an eye on during the 90-day comment period, which ends on January 31, 2014.