U.S. federal banking regulators yesterday issued their final rule on the liquidity coverage ratio (LCR) that formalizes what will become a key benchmark of liquidity for U.S. banks.
Fitch sees the final rule as a net positive for creditors and banks, as it solidifies bank liquidity during periods of stress.
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Banks with greater than $250bn in total consolidated assets will be held to a higher LCR standard than banks with total assets between $50bn and $250bn. We expect all banks to be able to meet the LCR requirement within the allotted time frame.
On balance, we do not expect any rating actions solely as a function of this new rule. The LCR rule will not apply to institutions below $50bn in total assets.
As these liquidity rules and the formerly finalized capital rules are implemented, the implications for cost of credit, access to credit and overall returns have yet to be seen. While these measures likely enhance the safety and soundness of large financial institutions, they invariably come with some additional costs and oversight.
The final rule is largely consistent with its original proposal; however, there are some important modifications in the final version. Only very modest changes were made in the final rule to the numerator (high-quality liquid assets, or HQLA) of the ratio. Alternatively, some important concessions were made to the denominator of the ratio, which comprises a 30-day stress scenario on bank’s funding profile.
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By GlobalDataChanges include expanding the definition of operational deposits to comprise deposits generated from other business functions. This is important because it means that a greater amount of deposits are now subject to a lower runoff rate in a period of stress.
Among other changes was a modification to the maximum net outflow calculation, which is now less stringent than originally proposed but more stringent than the latest version of the Basel III LCR standard. Additionally, some relief was given on runoff assumptions of various funding vehicles.
As a result, Fitch believes banks will focus more on optimizing the denominator of the LCR ratio. As an example, there could be a greater emphasis on generating fully insured retail deposits given the more modest runoff assumption for this funding option. Additionally, some institutions have other businesses, such as corporate trust, that generate LCR-friendly deposits that could be similarly advantaged in managing their LCR ratio.
Over time, Fitch would expect large bank balance sheets to become more homogenous than they have been historically, and this adds another component to bank regulation that will make it more difficult for banks to differentiate themselves from one another.
