The Run to Liquidity Regulation

There were early-warning tremors last week signaling that new liquidity rules are coming, with the Wall Street Journal on Friday forecasting an inter-agency proposal in what we expect to be early May.  But, while a liquidity rewrite has been obvious since at least Acting Comptroller Hsu’s preview in January, what the proposal will detail is far from clear.  Although Mr. Hsu and Vice Chair Barr are signaling structural change to the current liquidity construct, FRB Gov. Bowman insists that supervisory – not regulatory – standards should ensure that banks are resilient in the face of liquidity stress.  The only area where she appears to agree with Messrs. Hsu and Barr pertains to discount-window lending.  All of the agencies appear lined up to take last year’s inter-agency guidance on discount-window readiness and turn it into a rule that mandates actual preparation by all IDIs – and possibly – but far from certainly – including prepositioning collateral assets.  The proposal is likely also to address collateral integrity to limit the risk to the Federal Reserve and, indeed, a troubled bank if assets are pledged to Home Loan Banks but urgently needed for the discount window.  No word if the Fed also plans to address the FedWire closing times that made Signature’s collateral problem even worse (see Client Report REFORM222), but don’t wait up.