The Liquidity Coverage Ratio: U.S. Implementation

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2 The Liquidity Coverage Ratio: U.S. Implementation IBFed Annual Meeting October 9-10, 2014 London, England Alison Touhey Senior Regulatory Advisor American Bankers Association

3 I. Overview II. Scope III. Timing IV. HQLA V. Maturity Mismatch Add-on VI. Going Forward

4 U.S. LCR Overview The U.S. banking regulators finalized the LCR on September 3, 2014 As with the Proposal, the Final Rule remains more conservative than the Basel LCR Key differences include: Scope Timing Eligible HQLA Maturity Mismatch Add-on 4

5 Scope 5

6 U.S. LCR Applies to Banking Organizations with $50 Billion + in Assets U.S. banking regulators are implementing two LCRs: Full LCR: Bank holding companies with $250 billion or more in assets or internationally active* and their consolidated bank subsidiaries over $10 billion Daily calculation Maturity mismatch add-on Modified LCR: Bank holding companies with $50 - $250 billion and not international active 70% of the run-off rates in the full LCR Monthly calculation * $10 billion in on-balance sheet foreign exposure 6

7 U.S. LCR Does Not Currently Apply to U.S. Non-Financial Institutions Non-Bank SIFIs, as determined by the Financial Stability Oversight Council Insurers Going forward, the Fed will analyze these firms and may subject them to an LCR-like regulation 7

8 or Foreign Banking Organizations (FBOs) The LCR does not currently apply to FBOs or the IHCs they are required to form under Regulation YY, which implements Section 165 of the Dodd-Frank Act To the extent that an FBO has one or more U.S. subsidiaries that fall within the scope of the rule, they must comply e.g. a U.S. BHC with $50 billion in assets The Federal Reserve intends to implement an LCR-based standard for IHCs with $50 billion + in combined U.S. assets through future rulemaking The Fed reserves the authority to apply the LCR to any company outside the scope of the final rule 8

9 Timing 9

10 Phase-in of the U.S. LCR is More Aggressive U.S. LCR effective Jan 1, 2015 with a two year, graduated phase-in U.S. Full LCR 80% 90% 100% 100% 100% U.S. Mod. LCR N/A 90% 100% 100% 100% EU CRD IV 60% 70% 80% 100% 100% Basel 60% 70% 80% 90% 100% 10

11 U.S. G-SIBs Must Calculate Daily LCR -- Beginning Summer 2015 Jan 2015 July 2015 Jan 2016 July 2016 G-SIBs Monthly Daily Daily Daily $250 billion + Monthly Monthly Monthly Daily Modified LCR Monthly Monthly Monthly Monthly 11

12 Eligible HQLA 12

13 U.S. Definition of HQLA is Narrower U.S. Eligible HQLA Level 1 Excess reserves Certain Federal Reserve time deposits Foreign withdrawable reserves Securities issued or fully backed by the U.S. Treas. or other U.S. agency or a sovereign entity or multilateral organization Level 2A Level 2B Securities issued by, or guaranteed by a U.S. GSE (e.g. Fannie and Freddie) or sovereign or multilateral organization with no higher than a 20% RW; must meet the liquid and readily marketable standard Investment grade corporate debt security, that is not an obligation of a financial sector entity Publically traded equity included in Russell 1000 The U.S. LCR excludes: RMBS, municipal securities and ABS 13

14 Maturity Mismatch Add-on 14

15 U.S. Maturity Mismatch Add-on (Full LCR) Basel LCR does not account for in/outflow mismatches U.S. regulators concerned that during a crisis a bank may see significant outflows in the beginning of the 30 day stress, but would not receive offsetting inflows until the end of the 30 day period In order to ensure banks have a buffer sufficient to survive the 30 day stress, the U.S. regulators created a maturity mismatch add-on U.S. add-on calculation focuses on instruments with a contractual maturity and overnight transactions with financial entities

16 Maturity Mismatch Add-on Calculation To calculate total net outflows a bank must: 1) Aggregate and net cumulative in/outflows over the 30 day period; 2) Find the net cumulative peak day or the day with the largest difference in cumulative in/outflows that have set maturity dates with in the 30 day period; 3) Subtract the net cumulative peak day amount from the net cumulative outflow amount on the last day of the 30 day period (Must be equal to or greater than zero)

17 Maturity Mismatch Add-on Includes Only Certain Non-Maturity Items Outflows Retail brokered deposits Unsecured wholesale funding (less escrow and operational deposits) Secured funding/assets exchanges Foreign central bank borrowing Certain other non-operational contractual outflows Inflows Retail cash inflows Unsecured cash inflows Securities inflows Securities lending/assets exchange 17

18 Going Forward 18

19 Impact of the LCR will Extend Beyond Institutions Covered Under the Final Rule Re-pricing of funding Increased cost of retail deposits Credit market impacts Scarcity of U.S. Treasuries Increased cost of credit for LCR losers (e.g. state and municipal bond issuers) Examination standards 19

20 U.S. Agencies Have More To Do FAQs/Technical corrections Fed proposal on Municipal Securities Fed Proposal on FBOs LCR Disclosures 20

21 Canadian Liquidity Framework Presented to: IBFed Prudential Supervision Working Group October 10, 2014

22 Canadian Qualitative and Quantitative Liquidity Risk Requirements In February 2012, OSFI issued the final Liquidity Principles (Guideline B6), which are consistent with the Basel III qualitative principles. In May 2014, OSFI issued the final LAR Guideline, which is the quantitative liquidity framework for Canadian banks, including: Liquidity Coverage Ratio (LCR), Net Cumulative Cash Flow (NCCF), and select other monitoring tools. In July 2014, OSFI issued the LAR Reporting Requirements to support the calculation of the liquidity risk quantitative requirements. All banks will begin to formally submit to OSFI monthly LCR regulatory reports and other liquidity monitoring tools (including the NCCF) starting on February 14, In 2015, the minimum LCR requirement = 100% (i.e. no phase-in period will be permitted). 22

23 Canadian LCR Disclosure Requirements On July 16, 2014, OSFI issued the final Public Disclosure Requirements for Domestic Systemically Important Banks on Liquidity Coverage Ratio, which is consistent with January 2014 Basel III standards. The six Canadian D-SIB banks will begin to disclose the LCR starting in Q (i.e. In May 2015, with as at April 30, 2015 results). For now, the D-SIBs report monthly LCR averages, but will begin to disclose daily LCR averages in Q

24 EU LIQUIDITY COVERAGE RATIO Timothy Buenker Senior Policy Advisor Banking Supervision IBFED PSWG Meeting 9-10 October London

25 Background CRR published 2013 summer mandates LCR in Art 412 (1) Only assets and net outflows that should be reported are specified in CRR (reported from Q quarterly monthly 1 January 2015) European Banking Authority (EBA) made several recommendations in two reports on liquid assets and impacts published in December 2013 European Commission mandated to specify the LCR in form of a delegated act based on EBA reports by 30 June 2014 Consultation with stakeholders delayed this delegated act which is now expected to be published early October

26 EBA Main Findings 2013 Europe s banks at mid-2013 had a collective shortfall of 262 billion euros ($353 billion) Average LCR of 115%, however main shortfall remains with specialised banks and some jurisdictions with a low supply of HQLA Impact remains positive Covered bonds seen as equivalent to Sovereign Bonds but should remain Level 2A Supported finding for Basel Improvements to include equities and only RMBS in Level 2B

27 Scope of application and calculation (expected) All banks must hold and report no less than 100% of high quality liquid assets over projected stressed cash outflows over a 30-day period at solo entity level (unless waived at group level) Commission to report by 1 January 2015 on investment firms Local treatment in overseas entities should apply to non-eea assets EU treatment for EEA assets even if abroad

28 Entry into force and phasing in period (expected) 1 October 2015 = 60% 1 January 2016 = 70% 1 January 2017 = 80% 1 January 2018 = 100% Market pressure will require 100% well ahead of the regulatory requirement (at least at consolidated level)

29 Eligible Level 1 Assets ehqla (expected) Cash and central bank deposits All EEA sovereign are eligible and non EEA sovereign bonds including regional and local government (Credit Quality Step 1) Includes high quality covered bonds as Level 1 (credit quality step 1, 70% cap, 7% minimum haircut) Promotional and government owned banks Government backed private bank assets prior to 30 June 2014

30 Eligible Level 2 Assets HQLA (expected) Includes non-eea sovereigns, local government bonds, covered bonds (Level 2A, credit quality step 2, 20% RWA 40% cap, 15% haircut) Corporate debt (Level 2A, credit quality step 2, 15% haircut) restricted-use committed liquidity facilities (Level 2B) RMBS (Level 2B) Automotive ABS (Level 2B) SME and consumer credit ABS (Level 2B, 15% cap, 35% haircut) Equity (Level 2B) shares in CIUs (same treatment by underlying assets classifcation)

31 Cap on Inflows (expected) 75% cap on inflows except for intragroup and banks specialised in pass through mortgage lending, leasing, factoring, 90% for FIs financing automotive and consumer loans

32 Retail Net Outflows (expected) Not yet eligible for 3% outflow factor until DGSD fully implemented (on application of MS and Commission approval / not before 2019) 5% Insured retail deposits ( 100K) or 15-20% for other retails deposits (depending on classification size over EUR500 million, nature, remuneration, probability of withdrawal, location of depositor) PICs or Trust accounts: 40%

33 Wholesale Net Outflows (expected) Outflows from operational deposits: 25% Wholesale deposits other than financial: 20% if covered by deposit insurance (EUR100K) or 40% Credit and liquidity facilities: 5%, 20%, 40% and 100% (based on retail, wholesale, non-financial or financial) Derivative transactions subject to higher outflows