U.S. regulators adopt tighter rules for banks' cash needs

Wed Sep 3, 2014 3:51pm EDT
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By Emily Stephenson and Douwe Miedema

WASHINGTON (Reuters) - U.S. regulators on Wednesday issued rules for banks to hold enough easy-to-sell assets to keep them afloat during a crunch, after many were caught short of cash during the 2007-09 financial crisis.

The rules, adopted by the three main bank regulators, are a new building block in a global effort to make big banks such as JPMorgan Chase (JPM.N: Quote) and Citigroup (C.N: Quote) sturdier and head off a future meltdown of the financial system.

"Liquidity squeezes were the agents of contagion in the financial crisis," Federal Reserve Governor Daniel Tarullo said. "The (new rule) makes such squeezes less likely by limiting large banks from taking on excessive liquidity risk."

The Federal Reserve said big U.S. banks would need to hold a total of about $2.5 trillion in highly liquid assets by 2017, and that they would have a shortfall of about $100 billion if that threshold applied today.

The regulators also proposed rules determining how much money - or margin - swaps buyers and sellers must set aside when they do trades outside central clearing houses, which makes them more risky than cleared derivatives trades.

The liquidity rules, which were first proposed in October 2013, will force banks to hold enough liquid assets such as cash, treasury bonds and other securities to fund themselves over a 30-day period during a crisis.

In the wake of the last crisis, regulators have told banks to rely less on borrowed money, and to raise more shareholder equity. But they had yet to address problems with everyday cash needs that came to light during the crisis.

The final rule provided some relief from the proposed version, allowing smaller banks to make their liquidity calculations on a monthly basis rather than every day.   Continued...

Packs of U.S. one hundred dollar bills are counted at a bank in Westminster, Colorado November 3, 2009. Picture taken November 3, 2009.  REUTERS/Rick Wilking