ECONOMIC REPORT OF THE PRESIDENT

The three federal banking agencies have tailored both the LCR and
the Net Stable Funding Ratio rules to a bank’s riskiness and complexity. The
full requirements of each rule would apply to BHCs with $250 billion or
more in total assets while less stringent versions of these rules would apply
to BHCs with more than $50 billion but less than $250 billion in assets.
These rules do not apply to community banking institutions.7 The LCR rule
became effective on January 1, 2015, starting with an LCR of 80 percent and
increasing to 100 percent by January 1, 2017. The Net Stable Funding Ratio
requirement will not become effective until January 1, 2018. Despite criticism
of the expected negative impact of Net Stable Funding Ratio requirements,
the Federal Reserve Board found that, as of the end of 2015, nearly
all covered companies were already in compliance with the standard. The
Federal Reserve Board also found that because the aggregated stable funding
shortfall amount would be small relative to the size of these companies, the
costs connected to making changes to funding structures to comply with the
NSFR requirement would not be significant.
The result of the new bank liquidity requirements has been a general
improvement in the liquidity positions of U.S. banks. The liquidity ratio
reported in Figure 6-9 is similar to LCR but calculated using only publicly
available data.8 Figure 6.9 shows the average liquidity ratio of the largest
one percent of U.S. BHCs has risen from its trough at the beginning of the
financial crisis to well above levels observed before the crisis. Further, Figure
6-10 shows that BHCs reporting LCR using either the standard or modified
methods of calculating the LCR show marked improvement in the liquidity
available to them.
Thus, banks appear to be in a better position to weather a crisis or
liquidity event than they were on the eve of Lehman’s collapse. They have
more stable funding and more liquid assets than before, and hence the risks
that runs could cause an institution to seize up have been moderated.
7 The LCR rules apply to all banking organizations with $250 billion or more in total
consolidated assets or $10 billion or more in on-balance sheet foreign exposure and to these
banking organizations’ subsidiary depository institutions that have assets of $10 billion or
more. The rule also will apply a less stringent, modified LCR to bank holding companies and
savings and loan holding companies that do not meet these thresholds, but have $50 billion or
more in total assets.
8 This figure is reproduced from Choi and Choi (2016) with permission. The liquidity ratio is
similar to LCR, which is the ratio of the stock of high quality liquid assets (HQLA) to potential
net cash outflow over a 30 calendar day liquidity stress scenario. However, there are differences
in the liquidity adjustments for certain assets and liability classes from those used in the LCR
because the liquidity ratio uses only publicly-available data. Derivative exposures are ignored
due to data limitations.
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