U.S. Fed launches bank liquidity plan, says tougher than Basel

October 24, 2013
A view shows the Federal Reserve building in Washington
A view shows the Federal Reserve building on the day it is scheduled to release minutes of the Federal Open Market Committee from August 1, 2012, in Washington August 22, 2012. REUTERS/Larry Downing

By Douwe Miedema and Emily Stephenson

WASHINGTON (Reuters) - The U.S. Federal Reserve on Thursday unveiled a plan requiring banks to hold enough assets they can easily sell to survive a credit crunch, which it said was tougher than what international regulators demanded.

The plan, which will tell banks to hold enough liquid assets to meet their cash needs for 30 days, is a key plank of the Basel III capital rules agreed globally to make banks safer after the 2007-09 credit crisis.

But Fed Governor Dan Tarullo said that the U.S. plan had a tougher transition timeline, and stricter definition of what counted as the high-quality liquid assets the central bank will require the lenders to stock up on.

"Since financial crises usually begin with a liquidity squeeze that further weakens the capital position of vulnerable firms, it is essential that we adopt liquidity regulations," Tarullo said in notes prepared for speaking.

The Fed's board will meet later on Thursday to formally propose the rule, which was prepared by Fed staff.

The new rule would apply in full to banks with $250 billion or more in assets, and not at all to banks with less than $50 billion in assets. The group in between would be subject to a less stringent version of the rule.

The banks would hold the buffer of liquid assets, such as government bonds, to draw on to ensure they can meet withdrawals by depositors, post collateral due to credit rating downgrades and meet other needs.

The Fed proposed implementing the rules by January 2017, well before the 2019 deadline set by the Basel committee of global bank regulators.

Regulators have already proposed requiring U.S. banks to conduct regular liquidity stress tests to see how they would weather a crunch, Tarullo said.

The industry will have 90 days to submit comments on the proposals once the Fed formally propose the rules.

International regulators also are working on a longer-term liquidity standard, the so-called net stable funding ratio, which will also be implemented in America. That rule however has not yet been finalized by the Basel group.

(Reporting by Douwe Miedema; Editing by Chizu Nomiyama)