Regulators Want Banks to Be Ready for a Crisis

Money Jar BHFederal financial regulators have proposed a rule that is aimed at increasing the resiliency of the largest financial institutions. TheFederal Reserve, the Office of the Comptroller of the Currency (OCC), and the FDIC have proposed a net stable funding ratio (NSFR) rule.

The NSFR rule requires large banking organizations to maintain minimum levels of stable funding relative to the liquidity of their assets, derivatives, and commitments over a one-year period, according to the agencies’ announcement.

“The financial crisis proved that an overreliance on unstable funding sources, particularly short-term wholesale funding, leaves firms vulnerable to liquidity risk and poses serious threats to financial stability,” Fed Chair Janet Yellen said. “This proposal would establish the Net Stable Funding Ratio–or NSFR. This ratio would require large banking organizations to maintain a minimum amount of stable funding tailored to the different risk profiles of these firms and based on a one-year time horizon. By requiring our largest institutions to maintain an amount of stable funding that is appropriate given the liquidity of their assets, the NSFR would strengthen the financial system, making it more resilient to market stress.”

The purpose of the proposed NSFR rule is to reduce the likelihood that disruptions to a bank’s funding sources will compromised the liquidity of the bank. The proposed rule would reduce liquidity risk in the banking system by requiring covered institutions to maintain minimum levels of stable funding. Requiring banks to have more stable funding profiles will also enhance financial stability, according to the announcement.

“The NSFR requires these firms to maintain a stable funding profile over a one-year time horizon, thereby mitigating the potential effects of a firm’s loss of funding and creating strong incentives for firms to extend the maturity of their funding arrangements.,” Fed Governor Daniel K. Tarullo said. “In addition, because of the impact that a withdrawal of funding from the customers of large firms can have on the financial system during periods of stress, the proposal requires more stable funding for short-term loans to other financial firms.”

The new NSFR proposal complements the liquidity coverage ratio rule proposed by the agencies last week that requires certain banking institutions to hold a minimum amount of high-quality liquid assets that can easily be converted into cash to cover a bank’s cash outflow over a 30-day stress period.

The proposal is tailored to the risk of the banks; the largest firms, those with more than $250 billion in total consolidated assets or organizations that have subsidiary institutions that have assets or more than $10 billion, are subject to the most stringent requirements.

The NSFR rule would become effective on January 1, 2018. The public is invited to comment on the rule until August 5, 2016.

maintain a minimum level of stable funding relative to the liquidity of their assets, derivatives, and commitments, over a one-year period.

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