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Federal Reserve Toughens Requirements For Biggest Banks

Saturday, October 26th, 2013 Leave a comment Go to comments

This past Thursday, the Federal Reserve proposed a measure that requires big financial institutions to have enough cash and easy-to-sell securities to withstand a 30-day run on the bank.

According to Huff Post Business, the introduction of the “liquidity coverage ratio,” or LCR, marks the first time U.S. regulators have required banks to have a specific amount of liquid assets in order to withstand a run on the bank or a credit crunch. U.S. financial regulation for years has focused on capital, or the ratio of equity-to-debt that a bank uses to fund its loans and securities.

While global regulators have already agreed to stricter liquidity rules as part of the Basel III banking accords, the Fed’s version is tougher, underscoring the central bank’s concern that the nation’s largest banks still pose great risk to the U.S. financial system.

Here are other highlights regarding the Fed’s proposal:

  • Much of Wall Street and some Obama administration officials have feared that the proposed rule, with its incentive for banks to hold substantial amounts of U.S. Treasuries, risks creating a situation in which the demand for safe securities outstrips supply, leading to a shortage of so-called safe assets.
  • The Fed’s proposal is now open for public comment. The Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency, the two other federal bank regulators, also will propose the rule in the coming weeks.
  • The U.S. proposal is likely to be met with stiff resistance from financial companies, which have been lobbying regulators to relax the proposal ahead of its formal introduction.

 

Source: Huff Post Business

 

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