WASHINGTON: The Federal Reserve moved yesterday to require top banks to hold more super-safe assets to reduce the possibility of a liquidity squeeze like that which devastated the industry in 2008.
Under new capital rules, the largest US banks will have to keep a higher level of very liquid assets to be able to withstand a crisis situation like that of six years ago, when the government was forced to prop up cash-squeezed major banks and let hundreds of smaller institutions collapse.
But the new rule could have an impact on bank earnings, because they will have a smaller portion of their assets available for more lucrative lending and investment activities.
The stringent minimum liquidity coverage ratio will be applied to banks with $250bn or more in assets, with a lower ratio set for those with more than $50bn in assets.
It is based on an international standard set by the Basel Committee on Banking Supervision.
“As the financial crisis demonstrated, most of our largest and most systemically important financial institutions used excessive amounts of short-term wholesale funds and did not hold a sufficient amount of high-quality liquid assets to independently withstand the stressed market environment,” Fed Chair Janet Yellen said.
AFP
