U.S. proposes rule to shrink big banks' liquidity risk

WASHINGTON (Reuters) - The top U.S. banking regulator on Tuesday released its proposal for establishing a Net Stable Funding Ratio, a final piece in the puzzle to strengthen banks’ liquidity in case they come under financial stress.

The Federal Deposit Insurance Corp (FDIC) logo is seen at the FDIC headquarters as Chairman Sheila Bair announces the bank and thrift industry earnings for the fourth quarter 2010, in Washington, February 23, 2011. REUTERS/Jason Reed

The ratio is intended to ensure liquidity over a one-year horizon, compared with the liquidity coverage ratio of 2014 requiring banks to hold high-quality assets that could be readily converted into cash within 30 days. The ratio will “discourage reliance on more volatile short-term funding,” the FDIC said in its proposal.

“During the financial crisis, a number of large banking organizations failed, or experienced serious difficulties, in part because of severe liquidity problems,” said FDIC Chairman Martin Gruenberg. “The proposed rule would reduce the vulnerability of large banking organizations to the kind of collapse in liquidity that occurred to the crisis.”

The proposal is in line with the international Basel standard set in 2015, according to the FDIC. It differs primarily by providing a narrower definition of a “high-quality liquid asset” and a way to address “trapped liquidity.”

The NSFR would apply to bank holding companies and depository institutions with $250 billion or more in total consolidated assets or $10 billion or more in foreign exposure.

The Federal Reserve Board will release a less-stringent version for holding companies with at least $50 billion in assets that are not considered as big a risk to the financial system, the FDIC said.

The ratio would not apply to smaller holding companies, community banks, and nonbanking firms the federal government has designated “systematically important.”

Fifteen holding companies would have to comply with the full rule, and another 20 with the modified version, according to the proposal’s cost-benefit analysis.

The regulator expects the ratio, effective as of Jan. 1, 2018, to inspire few industry changes, estimating nearly all companies are already able to meet its requirements.

Banks, though, are concerned about an “already crowded field of recent rules targeting liquidity risk,” said Jeremy Newell, general counsel of The Clearing House Association, a trade group.

“Harmonization is key, as there are already very real concerns about whether the cumulative effect of these rules is unduly restricting the maturity transformation that is essential to the role that banks play in supporting economic growth,” he said.

The “required stable funding amount,” the part of the ratio that will likely generate the most debate among bankers, looks at assets, derivatives exposures and commitments using a set of standardized weightings. It is the minimum level of “stable funding” that the company is expected to maintain.

The other part of the ratio, the “available stable funding amount” measures the stability of equity and liabilities on hand. It emphasizes long-term debt, capital instruments, and insured deposits, according to the FDIC.

By requiring banks “to maintain more stable funding to support less liquid assets” the rule would cut the risk that a bank would need to sell off assets at fire-sale prices to meet liquidity demands, the FDIC said.

Editing by Chizu Nomiyama and Marguerita Choy