US Basel III Liquidity Coverage Ratio Proposal

Margaret E. Tahyar is a partner in the Financial Institutions Group at Davis Polk & Wardwell LLP. The following post is based on the overview of a Davis Polk visual memorandum; the complete publication, including diagrams, flowcharts, timelines, examples and comparison tables to illustrate key aspects of the US liquidity coverage ratio proposal, is available here.

Overview of U.S. Liquidity Coverage Ratio Proposal

  • The Federal Reserve, OCC and FDIC have issued a proposal to implement the Basel III liquidity coverage ratio (LCR) in the United States.
  • Part of the Basel III liquidity framework, the LCR requires a banking organization to maintain a minimum amount of liquid assets to withstand a 30-day standardized supervisory liquidity stress scenario.
  • The U.S. LCR proposal is more stringent than the Basel Committee’s LCR framework in several significant respects.
  • The U.S. LCR proposal contains two versions of the LCR:
    • A full version for large, internationally active banking organizations.
    • A modified, “light” version for other large bank holding companies and savings and loan holding companies (depository institution holding companies).
  • The proposed effective date is January 1, 2015, subject to a two-year phase-in period.
  • The comment period for the proposal ends on January 31, 2014.

Which Organizations Are Affected?

Subject to full version of LCR

  • Advanced approaches banking organization: A U.S. banking organization with ≥ $250 billion in total consolidated assets or ≥ $10 billion in on-balance sheet foreign exposure*
  • An advanced approaches banking organization’s consolidated U.S. depository institution subsidiary that has ≥ $10 billion in total consolidated assets
  • Nonbank SIFI: A nonbank financial company designated as systemically important by the Financial Stability Oversight Council that is not substantially engaged in insurance underwriting activities
  • A nonbank SIFI’s consolidated U.S. depository institution subsidiary that has ≥ $10 billion in total consolidated assets
  • Any other banking organization that becomes subject to the U.S. LCR framework because its primary federal banking regulator determines it is appropriate based on the banking organization’s size, level of complexity, risk profile, scope of operations, U.S. or non-U.S. affiliations or risk to the financial system

Subject to LCR “Light”

  • Depository institution holding companies with ≥ $50 billion in total consolidated assets that are not:
    • Grandfathered unitary savings and loan holding companies (SLHCs) deriving ≥ 50% of total assets or total revenues from activities not financial in nature;
    • Insurance underwriting companies; or
    • Holding ≥ 25% of total assets (other than credit risk insurance assets) in insurance underwriting subsidiaries.
  • U.S. LCR proposal would not apply to U.S. depository institution subsidiaries of the above-mentioned depository institution holding companies

Not subject to U.S. LCR proposal

  • A U.S. bank holding company (BHC) or SLHC with < $50 billion in total consolidated assets
  • A U.S. depository institution that is not an advanced approaches banking organization or a ≥ $10 billion consolidated subsidiary thereof
  • A U.S. depository institution that is not a ≥ $10 billion consolidated subsidiary of a nonbank SIFI
  • A banking organization that does not cross the applicability threshold but has opted into the U.S. advanced approaches capital rules
  • A bridge financial company, a subsidiary of a bridge financial company, a new depository institution or a bridge depository institution, as those terms are used in the resolution context

The full memorandum, which includes diagrams, flowcharts, timelines, examples and comparison tables to illustrate key aspects of the US liquidity coverage ratio proposal, is available here.

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One Comment

  1. Roger Nath
    Posted Sunday, July 20, 2014 at 2:51 pm | Permalink

    Has anyone done a comparison between Basel III Liquidity Requirements and the liquidity requirements emerging from EPS for FBO’s? What aspects of the Basel III regulation associated with liquidity can be proxied for liquidty under EPS?

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