Section 165 of Dodd‐Frank directs the Federal Reserve Board (FRB) to establish heightened liquidity standardsvfor both bank holding companies with over $50 billion in assets and FSOC‐designated nonbank systemically important financial institutions (covered companies). Liquidity standards aim to ensure that a bank is able payvits liabilities on time by holding enough “highly liquid assets” that could be quickly converted to cash.

The FRB’s Proposed Liquidity Requirements

Stage One: Corporate Governance & Qualitative Liquidity Risk Management Requirements

Corporate Governance:

• The Board of Directors is “ultimately responsible” for the liquidity risk assumed by the covered company, and must review annually the company’s “liquidity risk tolerance.”
  A “Risk Committee” must review and approve the liquidity costs, benefits, and risks of any significant new business line or product, and receive risk reports from Senior Management.

Qualitative Liquidity Requirements for Covered Companies Include:

• Liquidity stress testing conducted monthly to measure deteriorations in the value of assets under stressed market conditions using overnight, 30‐day, 90‐day, and one‐year time horizons.
• Maintaining a liquidity buffer of highly‐liquid assets sufficient to meet projected net cash outflows and projected loss or impairment of funding sources for 30 days under liquidity stress scenarios.
• Maintaining a Contingency Funding Plan (CFP) for managing stress events, to include a quantitative assessment of liquidity needs and funding sources and a liquidity event management process.

Stage Two: Quantitative Requirements & International Accords

The FRB intends to introduce regulatory liquidity frameworks consistent with international liquidity frameworks developed by the Basel Committee, which will be applied to covered companies, or a subset of covered companies. These frameworks include:

• The liquidity coverage ratio (LCR), a buffer sufficient to survive a 30‐day acute stress scenario, and
• The net stable funding ratio (NSFR), a liquidity buffer with a one‐year time horizon.

The FRB is studying the impact of the LCR and NSFR on the banking system and has endorsed making substantive changes to the framework put forth by the Basel Committee. The Clearing House has released an empirical study that includes several simple suggestions to create a more robust and accurate LCR.

The Clearing House is the nation’s oldest banking association and payments company established in 1853 to bring order to clearing and settling between banks. For more information see www.theclearinghouse.org.