United States: Dodd-Frank: The Liquidity Proposal Is Issued

The three Federal bank regulatory agencies have reached agreement on the terms of a proposed regulation that, for the first time, would impose quantitative requirements on major US banks' liquidity management practices. The proposal generally follows the international standard issued by the Basel Committee on Banking Supervision in early 2013 but with some twists, including an accelerated phase-in schedule. The comment period extends to the end of January 2014.

The proposal ("Liquidity Proposal") was approved yesterday by the Board of Governors of the Federal Reserve System ("Federal Reserve") in an open meeting, with adoption by the Office of the Comptroller of the Currency ("OCC") and Federal Deposit Insurance Corporation ("FDIC") expected shortly.1 It constitutes yet another effort by US supervisors to impose prudential requirements on systemically important financial institutions in order to prevent another financial crisis and subsequent use of taxpayer funds to bail the institutions out. Poor liquidity management is considered by the supervisors to be a major cause of the financial troubles that began in 2008.

In the simplest general terms, the Liquidity Proposal would require that a major US bank do two things: calculate on each business day the amounts of its projected liquidity inflows and outflows for the following 30 days and determine the extent to which projected outflows exceed projected inflows, and then maintain high-quality liquid assets ("HQLA") in an amount sufficient to cover the projected net outflow, subject to a minimum amount of 25 percent of total outflows. Naturally, the details for making these calculations are mind-numbing, but in summary:

  • The requirement applies to all US banks that have at least $250 billion in total assets or at least $10 billion in non-US exposure, and to bank holding companies that hold between $50 and $250 billion in total assets in modified form. It also applies to US bank holding companies meeting that size standard, and to smaller internationally-active US bank holding companies (total assets over $50 billion but less than $250 billion) but only with respect to a 21-day period rather than the full 30-day period noted above.
  • Projected inflows are to be calculated on the basis of either the maturity of the bank's assets or the qualitative nature of the assets, or both, for each of the 30 days following the calculation date. For example, the total inflow expected from retail customer obligations pursuant to contractual requirement during the next 30-day period is multiplied by 50 percent, and inflow from unsecured obligations due from financial institutions is multiplied by 100 percent while inflow from other wholesale customers or counterparties is multiplied by 50 percent.
  • Projected outflows are to be calculated in generally the same manner but based on the bank's obligations for each of the following 30 days. For example, the total outflow expected from "stable retail deposits" (effectively deposits that are fully covered by FDIC insurance) is 3 percent of all such deposits and from other retail deposits is 10 percent, and from committed credit facilities to non-financial corporates is 10 percent of the total undrawn amount and from committed liquidity facilities is 30 percent.
  • The largest difference between projected outflows and projected inflows for any of the 30 days is the "net cash outflow amount". This is the amount that has to be covered by HQLA. However, even if the difference is less than 25 percent of total outflows, the bank has to maintain no less than 25 percent of total outflows in HQLA, for the reason that a bank should be required to have at least a significant amount of HQLA even if its calculations show that outflows are always covered by inflows. Failure to hold the minimum required HQLA for three consecutive business days would result in a requirement to provide a plan to get into compliance, and possibly stronger supervisory action.

The next issue is the types of assets that qualify as HQLA. The idea is to require that HQLA be assets that should be easily saleable promptly at, or close to, fair value. In general, there are three categories of assets that meet this standard, subject to various limitations:

  • Debt securities issued or fully guaranteed by the Federal Government, Federal Reserve Bank balances above required reserves, and certain sovereign and multilateral development bank debt securities are permissible without limit. These are called Level 1 liquid assets.
  • Debt securities issued or fully guaranteed by a Federal Government-sponsored enterprise that the bank believes qualify as investment grade or by certain sovereigns and multilateral banks not included in Level 1 are Level 2A liquid assets. They are subject to a 15 percent haircut (that is, only 85 percent of the asset's fair market value counts) and may total no more than 40 percent of total HQLA, including any assets that qualify as Level 2B assets described below.
  • Certain publicly-issued debt securities issued by non-financial corporates that are categorized as investment grade and certain corporate common equity included in the Standard & Poor's 500 index or similar foreign index are Level 2B liquid assets. These securities are eligible because of concerns about possible shortages in the future of Level 1 and 2A securities. They are subject to a 50 percent haircut and may total no more than 15 percent of total HQLA.

Excluded from these categories are securities issued by any financial institution, defined broadly to include regulated banking and securities companies, registered and private investment funds, pension funds, and consolidated subsidiaries of any of them. In addition, municipal (State and city) debt, covered bonds and apparently mortgage-backed securities are excluded, though only municipal securities and covered bonds are mentioned explicitly; a Federal Reserve staff member said at the open meeting that mortgage-backed securities were excluded.

The bank must have the operational capability to monetize any of these assets "at any time" and either segregate them from other assets or demonstrate an ability to monetize them without conflicting with the bank's business risk or management strategy. Policies and procedures must govern the determination of HQLA on a daily basis, identify where they are held, and impose other prudential requirements. Holdings outside the United States would not be excluded from treatment as HQLA but the bank would have to be able to show that the assets can be moved to the US parent without regulatory, tax and other restrictions.

Several features of the Liquidity Proposal are notable:

  • The effective date would be January 1, 2015, with a two-year phase-in period rather than the longer period in the Basel proposal. Banks would have to have 80 percent of the required HQLA during 2015, 90 percent during 2016, and 100 percent thereafter. At the open meeting, a Federal Reserve staff member, in response to a question, indicated that total HQLA would likely be $2 trillion, most large banks already have 100 percent now, and that the total shortfall in HQLA is about $200 billion. The thought may be that banks would make up that shortage by 2017.
  • The calculation of required HQLA is based on the highest number on any day during the 30-day period, while the Basel proposal would have applied only to the number on the final 30th day.
  • The Federal Reserve's outstanding proposals to impose enhanced supervisory requirements, including liquidity standards, on major US bank holding companies and on major foreign banking organizations ("FBOs"), would impose a variety of governance and other qualitative requirements for liquidity management, but indicated that quantitative requirements would come later.2 Thus, the Liquidity Proposal should be read as a supplement to the earlier proposals.
  • Two issues remain unexplained concerning FBOs:

    • The FBO proposal would require FBOs with total US assets outside their US branches and agencies of $10 billion or more to establish an intermediate holding company ("IHC") that would hold all of the FBO's interests in its US subsidiaries. The proposal would impose liquidity standards on IHCs and indicated that quantitative requirements would await further action. The Liquidity Proposal imposes its requirements on US organizations that are "internationally active," but it is not clear that this standard applies to all FBO IHCs. The FBO proposal suggests that it would apply to all of them; stated differently, despite the Liquidity Proposal's applicability to US organizations that are internationally active, it appears to be assumed that any IHC of a large FBO meets the standard.
    • The FBO proposal would impose liquidity requirements on US branches and agencies of an FBO with an IHC, requiring that the liquidity requirements be calculated separately for the IHC and for US branches and agencies. There was no distinction between Federally-licensed and State-licensed ones. However, the Liquidity Proposal includes a footnote stating that the OCC will not impose the quantitative requirements on Federally-licensed offices.3 There is no mention of State-licensed offices, for which the Federal Reserve is primary Federal supervisor; accordingly, the FBO proposal's imposition of these requirements on State-licensed branches and agencies appears effective. This may have to await clarification in the final FBO adoption.
  • Similarly, the FBO proposal of a year ago imposed restrictions on the holding of HQLA outside the United States. However, the Liquidity Proposal imposes fewer restrictions on the use of non-US assets as HQLA and even allows non-US issuers' common equity denominated in other currencies to qualify in order to cover net cash outflows in that jurisdiction. Final action will need to clarify the extent to which the Liquidity Proposal's rules on non-US holdings applies to FBO IHCs.

As noted above, the comment period is scheduled to end January 31, 2014. We will monitor this issue as it develops.


1 The text is available on the Federal Reserve's website at http://www.federalreserve.gov/aboutthefed/boardmeetings/20131024openmaterials.htm. When adopted, this will be Federal Reserve Regulation WW.

2 The US proposal was issued in December 2011 and is at 77 Fed. Reg. 594 (Jan. 5, 2012), and the FBO proposal was issued in December 2012 and is at 77 Fed. Reg. 76628 (Dec. 28, 2012). If you wish to obtain more information on these proposals, you may review our client memoranda, "Tightening the Limits on Big US Banks" (Jan. 4, 2012), at http://www.shearman.com/files/Publication/501f116e-b686-41a0-a85b-5985316b6fbe/Presentation/PublicationAttachment/130a855c-f3f1-4e73-92a9-02efef118e21/Tightening-the-Limits-on-Big-US-Banks-FIA-010412.pdf and "Dodd-Frank: The Fed's Proposal for Enhanced Supervision of Foreign Banks" (Dec. 18, 2012), at http://www.shearman.com/files/Publication/50177e86-b1d7-41ee-b5c4-f084cac36422/Presentation/PublicationAttachment/668b01f2-d3d0-4869-9fea-56424aa77c20/Dodd-Frank-Feds-Proposal-for-Enhanced-Supervision-of-Foreign-Banks-FIA-121812.pdf.

3 Footnote 15 at page 11.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions