Statement by Martin J. Gruenberg
Member, FDIC Board of Directors
Final Rule on Changes to Applicability Thresholds for Regulatory Capital and Liquidity
Requirements
October 15, 2019
The final rule before the FDIC Board today 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 unnecessarily weaken a central post-crisis prudential
protection for the financial system and place the Deposit Insurance Fund at greater risk. For that
reason I will vote against the Final Rule.
This final rule is largely similar to the Notice of Proposed Rulemaking (NPR) approved
by the FDIC Board in November 2018. It would reduce the liquidity coverage ratio (LCR)
requirements to 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. It
would remove entirely the current modified LCR requirement, with one exception, for banking
organizations with assets between $100 billion and $250 billion. Neither of these changes is
required by the Economic Growth, Regulatory Relief, and Consumer Protection Act, which
made a number of amendments to the Dodd Frank Act and was signed into law last year.
In addition, the final rule 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.
These are the reasons I will vote against this final rule before the FDIC Board today. I
would like to include in the record for today’s Board meeting the remainder of my statement
which explains in greater detail my reasons for opposing the changes to the liquidity coverage
ratio.
Member, FDIC Board of Directors
Final Rule on Changes to Applicability Thresholds for Regulatory Capital and Liquidity
Requirements
October 15, 2019
The final rule before the FDIC Board today 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 unnecessarily weaken a central post-crisis prudential
protection for the financial system and place the Deposit Insurance Fund at greater risk. For that
reason I will vote against the Final Rule.
This final rule is largely similar to the Notice of Proposed Rulemaking (NPR) approved
by the FDIC Board in November 2018. It would reduce the liquidity coverage ratio (LCR)
requirements to 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. It
would remove entirely the current modified LCR requirement, with one exception, for banking
organizations with assets between $100 billion and $250 billion. Neither of these changes is
required by the Economic Growth, Regulatory Relief, and Consumer Protection Act, which
made a number of amendments to the Dodd Frank Act and was signed into law last year.
In addition, the final rule 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.
These are the reasons I will vote against this final rule before the FDIC Board today. I
would like to include in the record for today’s Board meeting the remainder of my statement
which explains in greater detail my reasons for opposing the changes to the liquidity coverage
ratio.
2
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.
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
1 78 Fed. Reg. 71817 (Nov. 29, 2013)
2 78 Fed. Reg. 71817, 71820
3 78 Fed. Reg. 71817, 71820
4 79 Fed. Reg. 61439 (Oct. 10, 2014)
5 Id. at 61444
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.
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
1 78 Fed. Reg. 71817 (Nov. 29, 2013)
2 78 Fed. Reg. 71817, 71820
3 78 Fed. Reg. 71817, 71820
4 79 Fed. Reg. 61439 (Oct. 10, 2014)
5 Id. at 61444