First take: Liquidity coverage ratio

September 2014

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Overview

On September 3, 2014, the US banking agencies (Federal Reserve, Office of the Comptroller of the Currency, and Federal Deposit Insurance Corporation) issued their final rule implementing a key component of the Basel III capital framework – the Liquidity Coverage Ratio (LCR). The LCR is a short-term liquidity measure intended to ensure that banking organizations maintain a sufficient pool of liquid assets to cover net cash outflows over a 30-day stress period.

With 119 public comment letters filed since the LCR was proposed in October 2013, the final rule provides relief with respect to some industry concerns including delaying daily LCR reporting, relaxing operational deposit characterization criteria, and lowering outflow rates for municipal deposits. See PwC’s A closer look, US regulatory outlook: The beginning of the end (July 2014), in which we anticipated these improvements.

However, the LCR retains most key components from the proposal, especially controversial features such as excluding municipal debt from high quality liquid assets (HQLA) and requiring the LCR calculation to be based on the highest occurrence of net cash flows over the 30-day stress period (i.e., the peak day approach). Therefore, although the final LCR came out a bit more lenient than the proposal, it nonetheless remains more stringent than Basel’s version, posing a challenge for US firms. See PwC’s Regulatory brief, Liquidity coverage ratio: Another brick in the wall (October 2013).

  1. The US LCR is manageable.
  2. Delayed daily reporting requirements.
  3. Only modest expansion of eligible HQLA.
  4. More realistic overall outflow rate assumptions.
  5. Improved definition for operational deposits.
  6. Lack of additional guidance on whether a deposit is “operational” or “excess".
  7. Relief granted for municipal deposits.
  8. Relaxation of “other” retail outflows.
  9. More details on undrawn commitments.
  10. Nonbank SIFIs excluded.

This First take elaborates on these key points and discusses what’s next.

Contact us

Dan Ryan
Banking and Capital Markets Leader
Tel: +1 (646) 471 8488
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Alison Gilmore
Asset and Wealth Management Marketing Leader
Tel: +1 (646) 471 0588
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