The US Liquidity Coverage Ratio (“LCR”) debuted in October 2013 when the federal banking agencies – Federal Reserve, FDIC, and OCC (“Agencies”) – jointly released their proposal. Although the industry had expected the US LCR to largely mirror the Basel Committee on Banking Supervision’s proposal that was finalized earlier, the US proposal came out quite differently. This difference between expectations and reality is reflected in the 83 letters submitted during the US proposal’s comment period that closed on January 31, 2014.
The comments put forth by the industry raise two broad matters – the definitions and component characteristics of the LCR, and the timing and operational requirements of the LCR’s implementation. Based on submitted comments, we believe the Agencies are likely to adjust several provisions of the LCR proposal by (a) including municipal securities in the definition of High Quality Liquid Assets (“HQLA”), (b) excluding government-sponsored enterprise debt from the 40% cap on Level 2 HQLA, (c) capping outflow rates for secured municipal deposits, and (d) requiring contractually binding agreements for the provision of operational services associated with operational deposits (as opposed to the deposits themselves).
We also believe the Agencies will finalize the LCR during the second quarter of 2014, thereby giving firms time to implement it by the proposed effective date of January 1, 2015.
This A closer look provides (a) background information on the US LCR proposal, (b) an overview of the most significant issues raised by the industry in comment letters and our expectation of the likely regulatory response, (c) advice on measuring the liquidity impact of operational deposits, (d) an analysis of the proposal’s impact on banks’ HQLA stock, and (e) our thoughts on how firms should be preparing to broadly implement the LCR.