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Published On: Fri, Sep 5th, 2014

US regulators introduce financial rules to help banks endure crisis situations

The financial rules issued by US regulators on Wednesday will enable banks to cope with crunch situations and will join global efforts to stave off future financial system meltdown.

US regulators introduce financial rules to help banks endure crisis situations

New financial regulations were issued on Wednesday. They cover bank holding of sufficient assets which are easy to sell, and thus enable them to stay afloat in crunch situations. In the financial crisis of 2007-2009, many US banks were short of cash. The financial rules are adopted by the three main bank regulators and belong to global efforts to make large banks stronger and avert future financial system meltdown.

According to the Federal Reserve, by 2017 large US banks would need about $2.5 trillion total in highly liquid assets; with today’s threshold in effect, they would be short of about $100 billion.

The liquidity rules first offered in October 2013 will obligate banks to hold cash, treasury bonds, securities and other liquid assets in sufficient amounts for funding during 30days in the event of a crisis. After the last crisis, regulators advised banks to rely more on shareholder equity than on borrowed money. But everyday cash needs pose problems that have yet to be solved.

With the final rule, smaller banks can calculate their liquidity on a monthly, not a daily, basis.Furthermore, Fed regulated companies of systemic financial importance are exempted.

According to Fed’s estimate, the current shortfall is half of the foreseen value in the proposed rule. The Fed plans on the inclusion of most liquid municipal bonds with the asset buffer, but currently they are not included, to the frustration of government officials as banks tend to buy fewer such bonds, so the burden lies on taxpayers.

The Fed is introducing more rules soon, with separate liquidity measures for foreign banks that remain exempted from the rule, to be finalized shortly. Other liquidity standards for the few Fed overseen non-banks are to be issued in the near-term as well.

Other upcoming rules are to restrict banks abundantly relying on short-term funding tools. Also forthcoming are global requirements for banks to calculate liquidity needs for a full year.

Other pending regulations concern margin requirements for swap trades set aside by buyers and sellers for transactions outside clearing houses. These new measures for swap deals are designated to deal with the risk of trading partners’s possible non-delivery on their promises.

Swaps thrived in the period before the crisis, as they were just lightly regulated. According to the new regulations, trading counterparties have to provide sufficient buffers to have time to remedy deals going sour. The period is 10 days; for cleared swaps, one to five days. Now cleared swaps are much cheaper to use, and margin rules could directly impact the popularity of such deals with clients.

Besides the Federal Reserve, the other agencies that adopt both regulation sets are the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency.

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