Federal Reserve Liquidity Rules Put the Squeeze on Big Banks

Federal Reserve

According to Business Week, the Federal Reserve liquidity coverage ratio proposal was approved earlier today. The rule, which affects banks with over a quarter of a trillion dollars in assets the most, will take the approved international rules a few steps further.

Putting a quantitative liquidity requirement in place, the Federal Reserve liquidity rule will mandate that banks must set aside close to two trillion dollars in highly liquid assets by 2017, a full two years earlier than international requirements. As of now, the Federal Reserve says banks are about $200 billion short.

The plan is for these assets to be a sort of insurance against another financial crisis, requiring banks to be able to withstand another extended (30 day) credit squeeze without the aid of the federal government, who last time required hundreds of billions of dollars in assistance.

In order to meet these requirements, the Federal Reserve liquidity rule allows banks to include as much cash, Treasuries, and central-bank reserves. Banks will also be allowed to have up to 40 percent of the required assets to be slightly less liquid. Smaller banks, those ranging from 50 to 250 billion dollars in assets, will only have set aside assets for a slightly easier 21 days.

The Federal Reserve liquidity rule will be open for public comment for about three months, after which it must be approved by the Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency.