The banking agencies’ proposed Liquidity Coverage Ratio — one of two Basel III liquidity standards — is not well-suited to U.S. markets and the liquidity risks U.S. banks face, ABA said in a comment letter. For example, ABA said, the proposal assumes massive cash outflows during a time of stress, whereas during the 2008 crisis banks encountered massive liquidity inflows from customers seeking safety.
ABA expressed specific concerns about the LCR’s treatment of high-quality liquid assets and cash outflows. The narrow definition of HQLA, it said, would “create significant market distortions,” especially during a crisis. ABA urged the agencies to minimize these distortions by counting GSE securities as Level 1 HQLA, counting cash and municipal securities as HQLA and excluding collateralized deposits from the LCR calculation.
Under the proposed ratio, internationally active banking organizations with over $250 billion in assets and certain subsidiaries would have to hold high-quality liquid assets against the largest “net cumulative cash outflow as of the end of the 30-day period.” A modified LCR would apply to holding companies with $50 billion in assets or more that are not internationally active, requiring banks to hold HQLA based on a 21-day stress scenario.
Read ABA’s comment letter.
ABA also submitted a joint comment letter with other trade groups expressing shared industry concerns. ABA also detailed concerns from its Corporate Trust Committee, which said that corporate trust services should be reclassified under the LCR and receive a flat 25% runoff factor.
Read the joint comment letter.
Read ABA’s Corporate Trust Committee comment letter.