The U.S. banking agencies proposed a Liquidity Coverage Ratio (“LCR”) in October 2013 that is more stringent than the LCR agreed to internationally by the Basel Committee on Banking Supervision.  The U.S. LCR would require bank holding companies and banks that are covered by the proposal to hold more high-quality liquid assets (“HQLA”) than under the Basel LCR, and require 100% compliance with the LCR by 2017, as opposed to 2019 under the Basel LCR.  For more background on the proposed U.S. LCR, see Bank Liquidity Regulation: An Overview of the Proposed U.S. LCR. 

TCH is strongly supportive of effective liquidity-risk management and believes the Basel LCR is a balanced approach to measuring and addressing liquidity risk.  The U.S. LCR should deviate from the Basel LCR only when unique circumstances in the U.S. warrant such differences.  A U.S. LCR that otherwise differs from international standards in material ways detracts from international goals of clarity and transparency across markets, competitive equality, and minimizing opportunities for regulatory arbitrage.

There are several key areas in which the proposed U.S. LCR differs from the Basel LCR in a manner that is not warranted by U.S.-specific circumstances and fails to account for certain unique aspects of U.S. banking and financial markets, including the following:

• The net cash outflow calculation should be modified to reflect more realistic treatment for non-contractual behavioral outflows.  An empirically-based understanding of maturity mismatches is essential before a peak day approach, which effectively converts the 30-day LCR measure into a “day 1” measure for many banks, is implemented.
• The deadline for daily calculations should be deferred to allow banks time to make the necessary operational changes and ensure accurate reporting.  It would be imprudent to adopt a standard that, due to its sheer complexity and lack of adequate time to properly prepare, risks providing regulators and the public with potentially flawed data.
• The U.S. LCR should not separately apply to subsidiary depository institutions of U.S. bank holding companies with $10 billion or more in consolidated total assets.  Due to the typical bank holding company structure in the U.S., and the need to avoid unnecessary trapped liquidity in subsidiaries, liquid assets generally should be used to satisfy liquidity needs within a corporate group, particularly during periods of stress.
• The proposed U.S. LCR requirements for operational deposits fail to fully and adequately recognize the scope of operational deposits generated by clearing, custody, cash management, and trustee activities, and should more closely align with the Basel LCR.
• The treatment of secured deposits of U.S. municipalities and public sector entities (“PSEs”) as secured funding transactions that are subject to the requirement to calculate HQLA on an unwind basis leads to substantial and unjustified negative distortions in the HQLA calculation.  The U.S. LCR as proposed could create a strong incentive for institutions to stop offering these products for PSEs, which could cause U.S. municipalities to have substantial practical difficulties in providing critical public services to citizens, meeting payroll for public servants, and more generally paying day-to-day bills.
• The definition of HQLA should be broadened using objective market criteria.  Among others, mortgage backed securities issued by Fannie Mae and Freddie Mac should be included as Level 1 assets, at least while Fannie Mae and Freddie Mac are under conservatorship and are explicitly guaranteed by the U.S. government, as they exhibit substantially similar market and liquidity characteristics as U.S. Treasuries and are consistent with the requirements for Level 1 assets.

Finally, it is exceedingly important that the U.S. banking agencies consider the cumulative impact of and interplay between implementation of the LCR and other regulatory initiatives.  Concerns with the proposed U.S. LCR may be exacerbated by the interplay of new Dodd-Frank regulations relating to capital, leverage, and other prudential standards and may create unintended consequences, particularly as the costs of liquidity regulation are uncertain and may not be fully understood.

For additional information, please contact Jill Hershey (jill.hershey@theclearinghouse.org, 202-649-4601) or John Van Etten (john.vanetten@theclearinghouse.org, 202-649-4617).