Regulators Adjust Liquidity Rule for Big Banks

A new rule adopted by U.S. banks will require over thirty of the largest banks, including Citigroup (C) and JPMorgan Chase (JPM), to add another $100 billion in cash or cash-like investments to what they currently hold to make sure that the firms don’t run out of money in a crisis. Previous expectations were for the banks to raise around $200 billion to satisfy the rule’s requirements. However, regulators have since reduced that number.

The liquidity rule is supposed to protect the financial system and the economy during times of stress in the market so that the same issues that led to the failures of Bear Stearns and Lehman Brothers during the 2008 economic meltdown don’t happen. The regulation mandates that firms have enough safe assets to cover 100% of their net cash outflows for 30 days when there is economic turmoil. With the final liquidity ratio banks, with assets between $50 billion and $250 billion will calculate their positions monthly instead of daily. They have until January 1, 2016 to comply with the rule.

According to The Wall Street Journal, The Clearing House, a trade group that represents banks, has expressed approval of the changes to the final rule. U.S. officials have said the liquidity coverage ratio creates a good balance between economic growth and financial stability. For now, municipal debt securities will not be considered safe, “high-quality liquid assets” that can go toward a bank’s compliance. Meantime, however, some people have expressed worry that when the markets and the economy are good the rule could impede banks from investing or lending.

Both the Federal Deposit Insurance Corp and the Fed board unanimously approved the rule. Meantime, Fed officials are also developing three other rules. One targets the funding of banks for periods longer than thirty days. The other is a capital requirement that would make it more costly for banks to depend on volatile kinds of short-term funding. The third is a requirement for banks and other financial market participants to retain minimum amounts of collateral on the margin when short-term funding transactions are involved.

The SSEK Partners Group represents institutional investors and high net worth individual investors in recouping their securities fraud losses.

U.S. Regulators Tweak Final Liquidity Rule for Large Banks, The Wall Street Journal, September 3, 2014

U.S. senator criticizes muni treatment in bank liquidity rules, Reuters, September 16, 2014

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