Statement by FDIC Board Member Martin J. Gruenberg
Meeting of the FDIC Board of Directors
Notice of Proposed Rulemaking on Changes to Applicability Thresholds for Regulatory
Capital and Liquidity Requirements
November 20, 2018
I would like to begin by thanking the staff for their work on this Notice of Proposed
Rulemaking (NPR) before the FDIC Board today. Since I intend to vote against this NPR, I
would like to take this opportunity to explain the reasons for my vote.
As staff indicated, this Notice of Proposed Rulemaking would establish a revised
framework for the application of regulatory capital and liquidity requirements for large U.S.
banking organizations with total assets of $100 billion or more. A consequence of the revised
framework would be to reduce significantly the liquidity requirements for banking organizations
with assets between $100 billion and $700 billion. This would, in my view, unnecessarily
weaken a central post-crisis prudential protection for the financial system and place the Deposit
Insurance Fund at greater risk.
My comments today will focus on the changes proposed to the liquidity coverage ratio
(LCR), a short-term liquidity buffer. The NPR also proposes parallel changes to the net stable
funding ratio (NSFR), a proposal that has yet to be finalized that would help ensure covered
firms are supported by stable funding over a longer-term one-year horizon. In addition, the NPR
would allow banks with assets between $250 billion and $700 billion to opt out of a requirement
to account in their capital for unrealized gains and losses on securities – otherwise known as
accumulated other comprehensive income (AOCI). The failure to account for unrealized losses
on securities in bank capital during the crisis allowed banks to appear more strongly capitalized
than they actually were. Removing this important post-crisis reform is also unwarranted. But as I
indicated, my comments today will focus on the liquidity coverage ratio.
In November 2013, the Federal Reserve, the OCC, and the FDIC issued a Notice of
Proposed Rulemaking to implement for the first time a quantitative liquidity requirement known
as the liquidity coverage ratio for large banking organizations in the United States.1 The LCR
was designed to improve the ability of the banking sector and individual banking organizations
to absorb liquidity shocks arising from financial or economic stress, without reliance on
government support, thus reducing the risk that financing stress in the banking sector would spill
over and damage the broader economy.
1 78 Fed. Reg. 71817 (Nov. 29, 2013)
Meeting of the FDIC Board of Directors
Notice of Proposed Rulemaking on Changes to Applicability Thresholds for Regulatory
Capital and Liquidity Requirements
November 20, 2018
I would like to begin by thanking the staff for their work on this Notice of Proposed
Rulemaking (NPR) before the FDIC Board today. Since I intend to vote against this NPR, I
would like to take this opportunity to explain the reasons for my vote.
As staff indicated, this Notice of Proposed Rulemaking would establish a revised
framework for the application of regulatory capital and liquidity requirements for large U.S.
banking organizations with total assets of $100 billion or more. A consequence of the revised
framework would be to reduce significantly the liquidity requirements for banking organizations
with assets between $100 billion and $700 billion. This would, in my view, unnecessarily
weaken a central post-crisis prudential protection for the financial system and place the Deposit
Insurance Fund at greater risk.
My comments today will focus on the changes proposed to the liquidity coverage ratio
(LCR), a short-term liquidity buffer. The NPR also proposes parallel changes to the net stable
funding ratio (NSFR), a proposal that has yet to be finalized that would help ensure covered
firms are supported by stable funding over a longer-term one-year horizon. In addition, the NPR
would allow banks with assets between $250 billion and $700 billion to opt out of a requirement
to account in their capital for unrealized gains and losses on securities – otherwise known as
accumulated other comprehensive income (AOCI). The failure to account for unrealized losses
on securities in bank capital during the crisis allowed banks to appear more strongly capitalized
than they actually were. Removing this important post-crisis reform is also unwarranted. But as I
indicated, my comments today will focus on the liquidity coverage ratio.
In November 2013, the Federal Reserve, the OCC, and the FDIC issued a Notice of
Proposed Rulemaking to implement for the first time a quantitative liquidity requirement known
as the liquidity coverage ratio for large banking organizations in the United States.1 The LCR
was designed to improve the ability of the banking sector and individual banking organizations
to absorb liquidity shocks arising from financial or economic stress, without reliance on
government support, thus reducing the risk that financing stress in the banking sector would spill
over and damage the broader economy.
1 78 Fed. Reg. 71817 (Nov. 29, 2013)
2
As the 2013 NPR pointed out, the financial crisis demonstrated significant weaknesses in
the liquidity positions of large banking organizations in the United States, many of which
experienced difficulty meeting their obligations due to a breakdown of funding markets.2 In
response to the breakdown, the Federal Reserve and the FDIC established various temporary
liquidity facilities during the crisis to provide extraordinary funding support for those
institutions.
The 2013 NPR also indicated that these events came in the wake of a period
characterized by ample liquidity in the financial system. The rapid reversal in market conditions
combined with an equally rapid decline in the availability of liquidity during the financial crisis
“illustrated both the speed with which liquidity can evaporate and the potential for protracted
illiquidity during and following these types of market events. In addition, the financial crisis
highlighted the pervasive detrimental effect of a liquidity crisis on the banking sector, the
financial system, and the economy as a whole.”3
In October 2014, the three banking agencies adopted a final rule implementing a
quantitative liquidity coverage ratio.4 A company subject to the rule is required to maintain an
amount of high quality liquid assets that is no less than 100 percent of its total net cash outflows
over a prospective 30-calendar day period. The rule applies to bank holding companies and
insured depository institutions with $250 billion or more in total assets or $10 billion or more in
on-balance sheet foreign exposure. The Federal Reserve also adopted its own modified liquidity
coverage ratio standard that is based on a 21-calendar day stress scenario that applies to bank
holding companies with total consolidated assets between $100 billion and $250 billion. The
LCR and the modified LCR were intended to be quantitative measures of liquidity to
complement existing supervisory guidance and the more qualitative and internal stress test
requirements of the Federal Reserve.5
The Notice of Proposed Rulemaking before the Board today would reduce the liquidity
coverage ratio requirements to between 70 and 85 percent of the full LCR for banking
organizations with assets between $250 billion and $700 billion, and less than $75 billion in
weighted short-term wholesale funding. The NPR would remove the current modified LCR
requirement for banking organizations with assets below $250 billion.
The premise for these changes is stated in the NPR, “The proposal builds on the agencies’
existing practice of tailoring capital and liquidity requirements based on the size, complexity,
and overall risk profile of banking organizations.”
There are five points I would make in regard to this proposal.
2 78 Fed. Reg. 71817, 71820
3 78 Fed. Reg. 71817, 71820
4 79 Fed. Reg. 61439 (Oct. 10, 2014)
5 79 Fed. Reg. 61439, 61444
As the 2013 NPR pointed out, the financial crisis demonstrated significant weaknesses in
the liquidity positions of large banking organizations in the United States, many of which
experienced difficulty meeting their obligations due to a breakdown of funding markets.2 In
response to the breakdown, the Federal Reserve and the FDIC established various temporary
liquidity facilities during the crisis to provide extraordinary funding support for those
institutions.
The 2013 NPR also indicated that these events came in the wake of a period
characterized by ample liquidity in the financial system. The rapid reversal in market conditions
combined with an equally rapid decline in the availability of liquidity during the financial crisis
“illustrated both the speed with which liquidity can evaporate and the potential for protracted
illiquidity during and following these types of market events. In addition, the financial crisis
highlighted the pervasive detrimental effect of a liquidity crisis on the banking sector, the
financial system, and the economy as a whole.”3
In October 2014, the three banking agencies adopted a final rule implementing a
quantitative liquidity coverage ratio.4 A company subject to the rule is required to maintain an
amount of high quality liquid assets that is no less than 100 percent of its total net cash outflows
over a prospective 30-calendar day period. The rule applies to bank holding companies and
insured depository institutions with $250 billion or more in total assets or $10 billion or more in
on-balance sheet foreign exposure. The Federal Reserve also adopted its own modified liquidity
coverage ratio standard that is based on a 21-calendar day stress scenario that applies to bank
holding companies with total consolidated assets between $100 billion and $250 billion. The
LCR and the modified LCR were intended to be quantitative measures of liquidity to
complement existing supervisory guidance and the more qualitative and internal stress test
requirements of the Federal Reserve.5
The Notice of Proposed Rulemaking before the Board today would reduce the liquidity
coverage ratio requirements to between 70 and 85 percent of the full LCR for banking
organizations with assets between $250 billion and $700 billion, and less than $75 billion in
weighted short-term wholesale funding. The NPR would remove the current modified LCR
requirement for banking organizations with assets below $250 billion.
The premise for these changes is stated in the NPR, “The proposal builds on the agencies’
existing practice of tailoring capital and liquidity requirements based on the size, complexity,
and overall risk profile of banking organizations.”
There are five points I would make in regard to this proposal.
2 78 Fed. Reg. 71817, 71820
3 78 Fed. Reg. 71817, 71820
4 79 Fed. Reg. 61439 (Oct. 10, 2014)
5 79 Fed. Reg. 61439, 61444