Regulators Near Release of Final Liquidity Rule
By Rob Blackwell

Federal regulators are aiming to finalize a rule in early September that would establish a tough new liquidity requirement for banks, according to multiple sources with knowledge of the situation. The agencies first proposed the plan last October, but have faced intense criticism from the industry related to some of its provisions, including what instruments count as the best forms of liquidity. At issue is the so-called “liquidity coverage ratio,” a requirement designed to provide banks with at least a 30-day buffer in the event of a prolonged financial crisis. While regulators have significant experience with capital ratios, which were strengthened as a result of the crisis, the liquidity ratio is a new and untested measure. It is meant to protect against the types of runs that occurred at Lehman Brothers, which had capital on hand but failed in large part because it was unable to fund itself. Some analysts said the regulators are likely to give ground in the final rule on how high quality assets are defined. Karen Shaw Petrou, a managing partner with Federal Financial Analytics, noted that the European Union has already expanded the definition to include covered bonds. “The EU is increasingly going off the global rails and that gives the U.S. greater flexibility,” said Petrou. “The EU is giving them cover.”