Fed considering ‘targeted adjustments’ to liquidity requirements; includes minimum amount of ‘readily available liquidity’

“Targeted adjustments” to liquidity requirements for firms supervised by the Federal Reserve are being explored by the agency to “ensure that all large banks maintain better liquidity risk management practices going forward,” the agency’s top supervisor said Monday.

Speaking to a conference in Fernadina Beach, Fla., sponsored by the Federal Reserve Bank of Atlanta, Fed Vice Chair for Supervision Michael Barr said the measures it is considering would complement banks’ capital requirements by “improving” their ability to respond to funding shocks.

Barr told the audience that consideration of adjustments to liquidity requirements arose from the failure of three, large regional banks in spring 2023, triggered by deposit runs on the banks. Those banks were Silicon Valley Bank (SVB) of Santa Clara, Calif.; Signature Bank of New York, N.Y., and First Republic Bank of San Francisco.

He said the Fed is considering three elements of a proposal:

  • A requirement that banks over a certain size maintain a minimum amount of readily available liquidity with a pool of reserves and pre-positioned collateral at the discount window, based on a fraction of their uninsured deposits. “Uninsured deposits often represent cash needed to meet near-term needs—like paying bills or making payroll—and we have seen depositors act quickly to withdraw these funds if their availability is in doubt,” Barr said. “It is vital that uninsured depositors have confidence that their funds will be readily available, if needed, and this confidence would be enhanced by a requirement that large banks have readily available liquidity to meet requests for these deposits.”
  • A restriction on the extent of reliance on held to maturity (HTM) assets in large banks’ liquidity buffers to address the known challenges with their monetization in stress conditions. Barr used as examples assets held under the liquidity coverage ratio (LCR) and the internal liquidity stress test (ILST) requirements.
  • The treatment of a handful of types of deposits in the current liquidity framework. “Observed deposit withdrawals from high-net-worth individuals and companies associated with venture capital or crypto-asset-related businesses suggest the need to re-calibrate deposit outflow assumptions in our rules for these types of depositors,” Barr said. “As we saw during the stress of a year ago, these types of deposits can flee banks much more quickly than previously anticipated.”

Barr also said the Fed is revisiting the details of the application of its current liquidity framework for large banks.

Federal Reserve Vice Chair for Supervision Michael S. Barr: On Building a Resilient Regulatory Framework