Opening Statement by Governor Daniel K. Tarullo
Precisely because of its novelty, this first liquidity regulation has taken longer to complete than the parts of Basel III that strengthened capital requirements for internationally active banks. It was important to consider carefully the potential impact of the LCR on financial markets. In the interim, of course, our supervisors have been conducting horizontal exams of liquidity risk management by the largest banking organizations. The LCR will provide a regulatory baseline for that work as it pertains to the 30-day stress period covered in this regulation.
When work is completed on the Net Stable Funding Ratio, which will require firms to have a stable funding structure over a one-year horizon, it will constitute the third element of a comprehensive approach to liquidity regulation. This approach is intended to limit destabilizing funding runs and credit contraction, while not creating incentives for firms to hoard liquidity in periods of stress.
I have a few additional points.
First, consistent with our overall regulatory approach and with the requirements of Section 165 of the Dodd-Frank Act, the rule applies differently to bank holding companies of differing systemic importance. The rule does not apply at all to bank holding companies with less than $50 billion in assets. Bank holding companies with between $50 billion and $250 billion in assets will be subject to a less stringent version of the LCR. Only bank holding companies with $250 billion or more in assets or with substantial international operations will be subject to the full panoply of requirements in the rule.
Second, this rule will apply only to domestic bank holding companies. We anticipate a future rulemaking extending an LCR to the U.S. intermediate holding companies and branches of large foreign banking organizations. Additionally, the rule would not apply to non-bank systemically important financial companies designated by the Financial Stability Oversight Council for supervision by the Federal Reserve. Liquidity standards would be applied to those institutions through rule or order, based among other things on an evaluation of the business model of each designated firm.
Third, the LCR does not address all risks associated with short-term wholesale funding. For example, it does not address liquidity needs beyond the 30-day horizon or the risks associated with even the largest matched repo books. There is thus still work to do in this area. When completed, the Net Stable Funding Ratio should address some of these risks. Additionally, we intend to incorporate reliance on short-term wholesale funding as a factor in setting the amounts of capital surcharges applicable to the most systemic banking organizations. Finally, we are working internationally to develop proposals for minimum collateral haircuts in securities financing transactions.
Fourth, I want to take note of one issue that was not resolved in this final rule. The proposed rulemaking excluded state and municipal bonds from the various categories of high-quality liquid assets (HQLA) that make up the numerator of a bank's liquidity coverage ratio. While it is true that most state and municipal bonds are not sufficiently liquid to serve the purposes of HQLA in stressed periods, public comments and staff analysis over the past several months suggest that the liquidity of some state and municipal bonds is comparable to that of the very liquid corporate bonds that can qualify as HQLA. Staff has been working on ideas to develop some criteria for determining which such bonds fall into this category and thus might be considered for inclusion as HQLA. That work has not yet been completed, and it is important to get this final rule adopted now, so that the largest banks can begin to prepare for its implementation on January 1. However, I anticipate that staff will be coming back to us with a report on efforts to develop a proposal along these lines.
As noted by the Chair, later in this meeting we will be considering a re-proposal of the swap margin rule. This re-proposal is an important outcome of domestic and global efforts to improve the regulation of swaps markets, reduce systemic risk, and provide appropriate incentives for central clearing of swaps.
Let me turn now to Mike Gibson for the staff presentation on the LCR.