Federal Reserve

Fed proposes requirement for banks to keep enough liquidity to tide them over a crisis

PUBLISHED : Friday, 25 October, 2013, 2:32pm
UPDATED : Friday, 25 October, 2013, 2:32pm

The US Federal Reserve proposed on Thursday that big banks keep enough cash, government bonds and other high-quality assets on hand to survive during a severe downturn on par with the 2008 financial crisis.

The proposal subjects US banks for the first time to so-called “liquidity” requirements. Liquidity is the ability to access cash quickly.

The largest banks – those with more than US$250 billion in assets – would be required to hold enough cash and securities to fund their operations for 30 days during a time of market stress.

Smaller banks – those with more than US$50 billion and less than US$250 billion – would have to keep enough to cover 21 days.

Fed officials said the rules are stronger than new international standards for banks. Combined, the largest banks would have to hold an estimated US$2 trillion in high-quality assets to meet the requirement. The banks already hold roughly 90 per cent of that amount, according to the Fed.

Liquidity is essential to a bank’s viability and central to the smooth functioning of the financial system
Fed chairman Ben Bernanke

The public has 90 days to comment on the proposal, which was approved unanimously by the Fed’s six-member board of governors. After that the rules would be phased in, beginning in January 2015.

“Liquidity is essential to a bank’s viability and central to the smooth functioning of the financial system,” Fed chairman Ben Bernanke said. He said the new regime “would foster a more resilient and safer financial system in conjunction with other reforms.”

The requirements were mandated by Congress after the financial crisis. They are part of new regulations that are intended to prevent another collapse severe enough to require taxpayer-funded bailouts and threaten the broader financial system.

Hundreds of US banks received federal bailouts during the crisis. Among them were the largest financial firms, including JPMorgan Chase, Goldman Sachs, Citigroup, Bank of America and Wells Fargo. The banking industry has been recovering steadily since then, with overall profits rising and banks starting to lend more freely.

The proposed requirements are “an important step forward, but there’s still more work to do”, said Fed vice-chair Janet Yellen, who has been nominated by US President Barack Obama to succeed Bernanke as chairman next year.