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From Banking and Finance Law Daily, November 24, 2015

Fed proposes requiring liquidity profile disclosures by large institutions

By Richard A. Roth, J.D.

The Federal Reserve Board is proposing to require large financial institutions that are subject to the liquidity coverage ratio rule to disclose publicly their liquidity coverage ratios and some of the factors that go into calculating that ratio. The Fed’s proposal also would give some holding companies that become subject to the LCR rule after its effective date a full year to come into compliance. Comments on the proposed rule must be submitted by Feb. 6, 2016.

LCR rule. The proposal builds on the LCR rule that was adopted jointly by the Fed, Office of the Comptroller of the Currency, and Federal Deposit Insurance Corporation in September 2014 (see Banking and Finance Law Daily, Sept. 3, 2014). When it takes effect, that rule will require each covered institution to hold high-quality, liquid assets (HQLA), such as central bank reserves and government and corporate debt that can be converted easily and quickly into cash, in an amount at least equal to its projected net cash outflow during a hypothetical 30-day stress period. As a firm’s LCR is the ratio of its HQLA to that net cash outflow, the LCR will need to be at least 1-to-1 when the rule takes full effect.

The LCR rule applies to bank holding companies and some savings and loan holding companies that have $250 billion or more in total assets or $10 billion or more in on-balance sheet foreign exposures. Covered organizations’ depository institution subsidiaries that have assets of $10 billion or more also are covered, as are nonbank financial companies the Financial Stability Oversight Council has designated for Fed supervision if the Fed has made the companies subject to the rule. The current proposed rule would not apply to depository institutions, but it would apply to some bank and thrift holding companies that have $50 billion or more in total consolidated assets but do not qualify as large and internationally active firms (termed “modified LCR holding companies”).

Required disclosures. The Fed believes that LCR-related disclosures will give market participants more information about a company’s liquidity risk and therefore improve market discipline. Under the proposal, a covered company would be required to disclose specific LCR calculation components in a standardized format and discuss some of its results. Disclosures would be required each quarter.

Required disclosures for each company would include:

  • average eligible HQLA, divided among each of the three categories—“Level 1 assets,” “Level 2A liquid assets,” and “Level 2B liquid assets”;
  • average cash outflows on both a weighted and unweighted basis, with separate disclosures of outflows from retail brokered deposits and secured wholesale funding;
  • average cash inflows on both a weighted and unweighted basis; and
  • average HQLA amount, average total net cash flow, and average LCR over the quarterly reporting period.

The proposal notes eight aspects of a company’s LCR results that may call for explanation. These include the main drivers of the results, the composition of the company’s HQLA, any concentration in funding sources, and other cash outflows and inflows. While such a discussion would not be required, the company would be required to provide a discussion of any significant changes that have rendered the current or prior disclosures unrepresentative of the company’s liquidity risk profile.

Phased-in compliance. Effectiveness of the disclosure requirements would be phased in through Jan. 1, 2018, based on a company’s size, complexity, and potential systemic impact.

If a company became subject to the rule for the first time after the rule took effect, disclosures would be required for the reporting period that began on the date the company was required to comply with the LCR rule (three months after the company becomes subject to the rule). A modified LCR holding company would be required to make disclosures beginning 18 months after it became subject to the LCR rule.

Modified LCR holding companies also would benefit from an extended LCR rule compliance requirement. They would not become subject to the modified LCR rule until one year after they passed the $50 billion threshold.

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