US regulators have proposed a new rule that would require the nation’s largest banks to hold sufficient amounts of stable funding to guarantee liquidity for a period of one year.
While this regulation will contribute to a more stable banking industry and will help to avert liquidity shortages such as the 'credit crunch' of 2008, this is not good news for corporates that need to borrow and are relying on their banks for financing. It's the latest in a series of national and international requirements, starting with Basel III, that have increasingly squeezed the supply of bank financing to businesses.
Proposed rule will reduce vulnerability of big banks
The regulators proposing the Net Stable Funding Ratio Rule (NSFR), are the Federal Deposit Insurance Corp (FDIC) and the Office of the Comptroller of the Currency. The FDIC's chairman Martin Gruenberg said in a statement: “During the financial crisis, a number of large banking organizations failed, or experienced serious difficulties, in part because of severe liquidity problems. The proposed rule would reduce the vulnerability of large banking organizations to the kind of collapse in liquidity that occurred during the crisis.”
Banks with more than $250 billion in assets, or with $10 billion or more in foreign exposures, would have to maintain certain levels of stable funding, which includes capital, long-term debt and other sources to account for the risks posed by riskier instruments such as derivatives and off-balance sheet activities.
This proposal complements the Liquidity Coverage Ratio Rule, which requires large banks to hold a sufficient reserve of high quality liquid assets to cover a 30-day period. The proposal is now subject to a public comment period that will end of 5 August.
US banks face $39 billion shortfall
However, USA Today reports that the Federal Reserve is expected to tentatively pass the NSFR within weeks. The paper also reports that, in aggregate, the banks subject to the rule would face a shortfall of $39 billion, or 0.5 per cent, of the total requirement.
CTMfile take: If liquidity from banks wasn't tight enough already, it is about to become even tighter in the US. Corporates will be looking for other sources of funding such as IPOs or joint ventures, venture capital or capital markets.
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