Banks Urge U.S. Regulators to Change Liquidity Rules

WASHINGTON — Seven industry trade groups representing the largest U.S. financial institutions are calling on U.S. regulators to revise a proposed liquidity requirement to reflect changes made by global regulators.

In a joint 89-page letter to the three banking regulators, the trade groups expressed unease over the differences between the Basel Committee on Banking Supervision's finalized rule regarding the so-called Liquidity Coverage Ratio as compared to the U.S. plan.

While the groups endorsed the necessity for a liquidity requirement for the largest financial institutions, they disagreed there should be any divergence in how the rule is applied to U.S. institutions versus global counterparts.

"We are concerned, however, that certain aspects of the U.S. agencies' proposal diverge from the standards established by the Basel Committee in ways that generally are not warranted, and so encourage the agencies to revisit the proposal to improve the accuracy and suitability of the LCR as a measure of actual liquidity risk," David Wagner, the Clearing House's executive managing director and head of finance affairs said in a press release announcing the letter.

The letter was signed by the Clearing House Association, Securities Industry and Financial Markets Association, the American Bankers Association, Financial Services Roundtable, Institutional of International Bankers, the International Association of Credit Portfolio Managers and the Structured Finance Industry Group.

Under the U.S. proposal, which regulators unveiled in October, banks must hold high-quality liquid assets for over a 30-day period to help lessen the impact of any financial shocks.

Global regulators finalized a similar rule, but opted last year to expand the types of high-quality liquid assets and give banks more time to build up their buffer. U.S. regulators, meanwhile, moved to strengthen the proposal in a few critical areas. For example, they tightened the definition of the kind of assets that could be used to fulfill the requirement and shortened how much time banks would have to comply with the rule.

The trade groups said such discrepancies could impact market liquidity as well as firms with cross-border operations. They also separately asked for increased flexibility in what kinds of assets banks can hold to meet the liquidity requirement.

"We hope regulators will consider the concerns outlined in the comment letter regarding U.S. divergence from the Basel LCR, including the proposed accelerated U.S. implementation schedule," Rich Foster, vice president and senior counsel for regulatory and legal affairs of the Financial Services Roundtable said.

In their letter, the associations endorsed the international Basel Committee's approach, writing it "strikes an appropriate balance between accurately capturing liquidity risk and the concerns raised by banks in their comments leading up to the Basel LCR."

Given the landmark effort, U.S. regulators tried to signal last fall that they would maintain some flexibility in how they implement the proposal once finalized, but it's unclear whether they will make changes to bring the U.S. version in line with the international accord.

Representatives from the Federal Reserve Board, Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. were not immediately available to comment.

The trade groups are asking regulators to look at a myriad of issues, such as broadening the definition of high-quality liquid assets to include mortgage backed securities issued by Fannie Mae and Freddie Mac and explicitly excluding subsidiary depository institutions from having to meet the liquidity requirement.