Thursday, September 04 09:37:13
U.S. regulators on Wednesday issued rules for banks to hold enough easy-to-sell assets to keep them afloat during a crunch, after many were caught short of cash during the 2007-09 financial crisis.
The rules, adopted by the three main bank regulators, are a new building block in a global effort to make big banks such as JPMorgan Chase and Citigroup sturdier and head off a future meltdown of the financial system.
"Liquidity squeezes were the agents of contagion in the financial crisis," Federal Reserve Governor Daniel Tarullo said. "The (new rule) makes such squeezes less likely by limiting large banks from taking on excessive liquidity risk."
The Federal Reserve said big U.S. banks would need to hold a total of about $2.5 trillion in highly liquid assets by 2017, and that they would have a shortfall of about $100 billion if that threshold applied today.
The regulators also proposed rules determining how much money - or margin - swaps buyers and sellers must set aside when they do trades outside central clearing houses, which makes them more risky than cleared derivatives trades.
The liquidity rules, which were first proposed in October 2013, will force banks to hold enough liquid assets such as cash, treasury bonds and other securities to fund themselves over a 30-day period during a crisis.
In the wake of the last crisis, regulators have told banks to rely less on borrowed money, and to raise more shareholder equity. But they had yet to address problems with everyday cash needs that came to light during the crisis.
The final rule provided some relief from the proposed version, allowing smaller banks to make their liquidity calculations on a monthly basis rather than every day.
It also exempted companies regulated by the Fed that are deemed to be of systemic financial importance but that are not banks - such as insurer Prudential Financial Inc.
Banks with more than $250 billion in assets will still have to tabulate their daily liquidity needs.
The Fed's estimate of the current shortfall is half of what it foresaw in its proposed rule. Bank of New York Mellon, PNC Financial Services and U.S. Bancorp are examples of banks that currently do not meet the ratio, according to a note by KBW research analysts.
Fed staff said they want to work on a plan to eventually include the most liquid municipal bonds in the asset buffer, although for now they will not count, something that has frustrated local government officials, who have argued banks will buy fewer of their bonds, and taxpayers will shoulder more costs for projects such as new roads.
U.S. cities and states criticized the regulators' tightening of the rules on Wednesday, saying it would raise their borrowing costs and hamper vital infrastructure projects. (Reuters)
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