By Douwe Miedema and Emily Stephenson
WASHINGTON, Oct 24 (Reuters) - U.S. regulators unveiled aplan on Thursday for banks to hold enough assets they can easilysell to survive a credit crunch, calling on U.S. banks to meetnew liquidity standards two years before most foreign banks mustcomply.
The proposal, which tells banks to hold enough liquid assetsto meet their cash needs for 30 days, is a key plank of theBasel III capital rules agreed globally to make banks saferafter the 2007-09 credit crisis.
Federal Reserve officials voted unanimously to propose U.S.rules with a shorter transition timeline than Basel calls for,and a stricter standard for how banks calculate their liquidasset needs.
"Since financial crises usually begin with a liquiditysqueeze that further weakens the capital position of vulnerablefirms, it is essential that we adopt liquidity regulations," FedGovernor Daniel Tarullo said at a meeting on Thursday.
Regulators said the liquidity rules would ensure that, in acrunch, banks would have enough government debt and othereasy-to-sell assets on hand to cope with customer withdrawals,post collateral and meet other needs.
Banks with $250 billion or more in assets, such as JPMorganChase & Co and Goldman Sachs Group Inc, must meetthe full requirement, while banks with less than $50 billionwould be exempt. Mid-sized banks that fall in between would besubject to a less stringent liquidity requirement.
Fed staff estimated a rough shortfall of about $200 billionin liquid assets across all institutions as a result of therule, a gap the banks would have until 2017 to address.
The international version gave banks until 2019 to fullycomply because of concerns that a quick transition would hampereconomic growth.
"It's clear that the other guys won't have to have thatmoney squirreled away for several more years after our guys,"said Bill Sweet, a partner with the law firm Skadden, Arps,Slate, Meagher & Flom.
Fed officials said they decided on the shorter timeframebecause U.S. banks already appeared to be close to complying.
JPMorgan, Goldman Sachs, Citigroup Inc and Morgan Stanley all have said previously that they hadenough liquid assets stockpiled to meet the Basel requirements.None commented specifically on the new rules.
Under the Basel rule, banks would calculate their expectedobligations and hold enough liquid assets to cover net cashexpenditures at the end of a 30-day period.
In a twist, the Fed's rule calls for banks to calculate liquidity ratios based on the particular day when cash outflowsare the highest. That could mean U.S. banks need more liquidassets than they would under the international rule, said OliverIreland, a partner at the law firm Morrison Foerster who alsohas worked at the Fed.
"Essentially, what they've done is they've created a higherratio," he said.
"You could have real volatility in liquidity during a periodbecause of just cash flow issues generally, how they shape up,and so this could be a very big deal," said Ireland, who also expected banks to push back against the change.
Banks will have 90 days to submit comments after whichregulators will decide whether to make the plan final. TheFederal Deposit Insurance Corp and the Office of the Comptrollerof the Currency are expected to propose similar rules.
U.S. government debt and excess reserves held at the Fed aredeemed the most liquid under the Fed's proposal, while claims ongovernment-sponsored enterprises, such as mortgage financegiants Fannie Mae and Freddie Mac, are lessliquid and might make up only 40 percent of the buffer.
Covered bonds, private-label mortgage securities andmunicipal debt would not count toward the liquidity buffer, Fedstaff said.7
Regulators already keep an eye on banks' liquid assets, andthe Fed has proposed requiring U.S. banks to conduct liquiditystress tests. This is the first quantitative requirementgoverning liquid assets, Fed officials said.
International regulators also are working on a longer-termliquidity standard, the so-called net stable funding ratio,which will also be implemented in the United States.
"While this is an important step forward, there's still morework to do," said Janet Yellen, the Fed's vice chairman andPresident Barack Obama's choice to lead the agency next.
"There certainly remains a need to address the financialstability risks associated with short-term wholesale fundingtransactions," she said.
The net stable funding ratio rule has not yet been finalizedby the Basel group.
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