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Fed proposes minimum liquidity requirements for big banks

tighten money

For the first time in its regulatory history, the Federal Reserve Board is proposing a rule that would create a standardized, minimum liquidity requirement for banks deemed systemically important.

As part of the standard, large banks and non-banks deemed systemically important by the Financial Stability Oversight Council would be forced to hold minimum amounts of 'high-quality, liquidity assets,' the Fed said Thursday.

Those assets would come in the form of central bank reserves and any other type of government and corporate debt that can be seamlessly convertible to cash.  

"Each institution would be required to hold liquidity in an amount equal to or greater than its projected cash outflows minus its projected cash inflows during a short-term stress period. The ratio of the firm's liquid assets to its projected net cash outflow is its ‘liquidity coverage ratio,’ or LCR,” the Federal Reserve Board explained.

The standard would apply to international banks – those with generally $250 billion or more in consolidated assets or $10 billion or more in on-balance sheet foreign exposure, the Fed said.

It also would apply to non-banks that have the potential to impact the global financial system in times of crisis.  

The Fed developed the proposed rule in tandem with the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency. Regulators will be accepting comments on the standard through Jan. 31, 2014.

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