By Ryan Tracy and Lalita Clozel
Regulators plan to pare back requirements that banks keep
billions of dollars of cash on hand to pay short-term bills. No one
knows for sure what will happen next.
The liquidity coverage ratio rule was invented to protect banks
from credit freezes similar to the 2008 financial meltdown. Four
years ago, the Federal Reserve began requiring banks to keep enough
cash on hand--or easy-to-sell assets such as Treasury bonds--to
cover expected bills for the next 30 days.
On Wednesday, under Trump-appointed regulators, the Fed proposed
reducing the required ratio for four large U.S. lenders and
removing it altogether for 11 others, in one of the most
significant regulatory relief measures for banks since the
financial crisis.
The changes would free the banks up to repurpose as much as $77
billion in assets locked up by the current rule--a small percentage
of the total liquid assets held by all banks with more than $100
billion in assets, the Fed said. Nine of the largest U.S. banks
would see no change under the proposal.
Some see an economic boost where banks rededicate the cash to
loans, long-term securities or other higher-yielding but riskier
assets.
"This regulatory relief is very important to sustain the
economic juggernaut that we have going now," House Financial
Services Committee Chairman Jeb Hensarling (R., Texas) said, adding
that when banks makes a loan, "the cost of compliance is going to
be put into that interest rate."
Critics say the change won't significantly boost lending, but
that it will increase risk.
Fed officials said they tried to assess whether loosening the
rules would increase lending--and couldn't find conclusive evidence
either way.
Fed governor Lael Brainard, an Obama appointee who dissented
from her colleagues' decision to approve the proposal, said, "I see
no change in the financial environment...that would require us to
substantially weaken a rule that was backed by strong analysis."
She added that banks are "providing ample credit and earning ample
profits" under current liquidity requirements.
In adopting the liquidity rules, Fed officials cited the 2008
crisis. Many banks then were relying on volatile funding sources
that suddenly evaporated, leaving taxpayers on the hook to keep the
financial system functioning.
Three lenders in the range of about $100 billion to $300 billion
in assets faced deep liquidity problems during the crisis and had
to be sold in emergency deals, Ms. Brainard pointed out.
The Fed said banks affected by the liquidity-rule changes have
much firmer funding today. These banks' assets are about 14% liquid
on average today, up from 5% for banks of that size in 2006 and
2007, according to the Fed.
Fed officials expect the impact of the changes to be modest
overall. The regulator will still conduct "stress tests" of banks'
liquidity, though the results won't be made public, and for some
banks, those tests could be even more restrictive than the
liquidity coverage ratio, officials said.
Fed Vice Chairman for Supervision Randal Quarles, who supported
the rule changes, said he hopes "firms will see reduced regulatory
complexity and easier compliance with no decline in the resiliency
of the U.S. banking system."
Banks with assets of $250 billion to $700 billion could cut
their buffers of "liquid assets" such as Treasury securities by up
to $43 billion, the Fed estimated. Affected firms include U.S.
Bancorp, PNC Financial Services Group Inc. and Capital One
Financial Corp. An additional 11 banks with assets of $100 billion
to $250 billion would be exempted from the liquidity coverage ratio
entirely, freeing up liquid assets of up to $34 billion, the Fed
said.
What banks will actually do with the extra cash is an open
question.
William Lang, managing director at International Business
Machines Corp.'s Promontory Financial Group unit and a former Fed
bank supervisor, said banks should get a "substantial benefit." He
said they could boost returns by converting short-term,
easy-to-sell assets such as Treasury bonds into
higher-yielding--and riskier--long-term assets.
The impact might be small in the context of the broader Treasury
market, given that big, systemically important banks will still
need to hold the debt, said Jabaz Mathai, head of U.S.
interest-rate strategy at Citigroup Inc.
Wayne Abernathy, an executive vice president at the American
Bankers Association, said that giving banks more flexibility around
funding sources could boost profitability and allow them to make
more loans. "You're taking away some of the barriers [and] allowing
them to be more aggressive," he said. He added, however, that even
with the changes, liquidity requirements would be too strict.
Wednesday's proposal "strikes a good balance that would allow
banks to foster economic growth, better serve customers, while
keeping the banking system strong," U.S. Bancorp said in a
statement
PNC said the proposal "acknowledges the real differences between
the business model and risk profiles of Main Street banks, like
PNC, and globally systemically important banks."
Capital One didn't respond to requests for comment.
Daniel Kruger contributed to this article.
Write to Ryan Tracy at ryan.tracy@wsj.com and Lalita Clozel at
lalita.clozel.@wsj.com
(END) Dow Jones Newswires
November 02, 2018 07:14 ET (11:14 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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