“It is clear that liquidity regulation has the potential to generate unintended effects,” he said, noting that the Basel liquidity buffers could prod banks to hoard liquid assets during a crunch rather than using it “to relieve the funding needs of households and other firms.”
Thus, supervisors will employ “context-dependent” remedies when bank liquidity falls below regulatory thresholds. Tarullo said:
A firm that falls out of compliance with the LCR or NSFR during a period of generalized stress should not be subject to automatic sanctions, but instead given an opportunity to come back into compliance in a way that does not expose either the firm or the system to greater stress.
He noted that the largest U.S. banks have increased their high-quality liquid assets by about one-third since 2012 while the use of short-term wholesale funding has “dropped considerably.” But he warned that if nonbanks increase their use of such funding, regulators may need to apply liquidity standards “on a market-wide basis.”
Read the speech.