FINANCIAL INSTITUTIONS ADVISORY & CLIENT PUBLICATION
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September 29, 2014
Basel III Framework: Liquidity Coverage Ratio (US Implementation)
The three US bank regulatory agencies issued a final regulation implementing the Basel III Liquidity Coverage Ratio (LCR) which requires banking organizations to maintain a minimum amount of liquid assets in order to meet short-term liquidity needs. The LCR is to be phased in over a three-year period beginning in January 2015. In the EU, the LCR standards have already been implemented although further technical details remain to be fleshed out by secondary legislation ahead of January 2015.
The Regulation adopted by the Office of the Comptroller of the Currency (“OCC”), Board of Governors of the Federal Reserve System (“Fed”), and Federal Deposit Insurance Corporation (“FDIC”) (collectively the “US Supervisors”) is a requirement of Section 165 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. It applies to the largest US banking organizations which are, in general, those with $250 billion or more in consolidated assets and $10 billion or more in foreign exposures. A modified version applies to those US banking organizations with $50 billion or more in consolidated assets.1 Non-US banking organizations are not covered by the Regulation but are expected to be subject to the similar requirements in the future. The LCR was developed in response to poor liquidity management within banks that contributed to the financial crisis. It provides for liquidity buffers to be maintained that are sufficient to absorb liquidity needs under stressed conditions. This is a core element of the 1 The Regulation has not yet been published in the Federal Register. The Regulation is available at http://www.federalreserve.gov/newsevents/press/bcreg/20140903a.htm. The proposals were published at 78 Fed.Reg. 230 (November 29, 2013). The Regulation generally conforms to the analogous international liquidity standard originally published by the Basel Committee on Bank Supervision (the “Basel Committee”) in 2010 and revised in 2013, available at http://www.bis.org/publ/bcbs238.htm.