Banking Agencies Issue Final Liquidity Coverage Ratio Regulations

The Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System ("FRB") and the Federal Deposit Insurance Corporation ("FDIC") issued a joint final rule that implements a minimum liquidity coverage ratio ("LCR") requirement for certain large bank holding companies, savings and loan holding companies, and depository institutions.

The final rule would require the largest U.S. banking organizations to maintain certain high-quality liquid assets ("HQLA") equal to projected stressed cash outflows over a 30 calendar-day stressed scenario. These organizations include those with consolidated assets of $250 billion or more, total consolidated on-balance sheet foreign exposures of $10 billion or more, and their respective subsidiary depository institutions with $10 billion or more of total consolidated assets. A less stringent LCR requirement (referred to as the "modified LCR") would apply to certain smaller depository institution holding companies with assets of $50 billion or more. Depository institution holding companies with assets less than $50 billion will not be subject to the LCR. The final LCR regulations will not apply to nonbank financial companies designated by FSOC for FRB supervision, although the FRB may impose comparable liquidity requirements on such designated entities by order.

The final LCR will proceed in phases, incorporating the required daily LCR calculations starting January 1, 2015 for the very largest covered companies (i.e., those with $700 billion or more in total consolidated assets or $10 trillion or more in assets under custody). Other covered companies must also begin LCR calculations on January 1, 2015, although these covered companies may use month-end LCR calculations prior to January 1, 2016, with daily LCR calculations required thereafter. The LCR ratios themselves also phase in, with covered companies required to achieve 80% and 90% of the minimum LCR on January 1, 2015 and January 1, 2016, respectively, and with full compliance required by January 1, 2017. Smaller covered companies – those subject to the modified LCR – will not be subject to the LCR requirements until January 1, 2016, and may calculate their LCR on a monthly basis (rather than a daily basis) going forward.

In other significant changes from the proposal, the final rule relaxes certain provisions that would have limited the ability of investment grade corporate debt and publicly traded common equity to qualify as HQLA. Although municipal securities are still not considered HQLA under the final rule, the FRB staff recommended that the FRB issue a later proposal that would treat highly liquid municipal securities as HQLA. The final rule also makes modest changes in the calculations for net cash outflow calculations. Due to operational considerations, the final rule dropped the proposal that covered companies subject to the modified LCR calculate net cash outflows only over a 21-day period rather than a 30-day period. In order to alleviate the impact of the LCR on these smaller companies, the final rule states that the minimum LCR requirement for these companies would be only 70% of the ratio required of larger covered companies.

For further information with regard to this final rule, please contact Scott Cammarn.

See: Board Memo on Final Rule; FRB Press Release; FDIC Press Release; OCC Press Release. See also: Chair Yellen's Statement; Governor Tarullo's Statement.