The Federal Reserve has proposed a new rule that would strengthen banks' and other large financial institutions' liquidity positions.
The rule would create a standardized minimum liquidity requirement for large and internationally active banks and certain other nonbank financial companies designated as important to the financial system. These companies would be required to hold minimum amounts of high-quality liquid assets that can be easily and quickly converted into cash, the Fed said. Examples of high-quality liquid assets could include central bank reserves and government and corporate debt.
Companies would be required to hold liquidity equal to or more than their projected cash outflows minus their projected cash inflows during a short-term stress period. The ratio of a company's liquid assets to its projected net cash outflow is known as its liquidity coverage ratio.
Institutions are already subject to other rules related to their bank capital positions. Capital is the difference between a company's assets and liabilities while liquidity measures its ability to convert its assets into cash. Assets that can be converted quickly are referred to as liquid assets.
Just as cash and assets can help an individual or family remain financially stable and secure, appropriate capital and liquidity can help ensure a company is viable and not in danger of insolvency.
The new liquidity coverage ratio would apply to all internationally active banking organizations and systemically important nonbank financial institutions. A less stringent modified ratio would apply to bank and savings-and-loan holding companies that aren't internationally active but have total assets of more than $50 billion.
In a statement, Fed Chairman Ben Bernanke said that liquidity is essential to banks' viability and important to the financial system as a whole.
"The proposed rule would, for the first time in the U.S., put in place a quantitative liquidity requirement that would foster a more resilient and safer financial system in conjunction with other reforms," Bernanke said.
The rule was developed with two other federal agencies, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency. Comments will be received through Jan. 31.
Do you think these measures are enough to protect the banking system?
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