Federal banking regulators continue to ramp up scrutiny of liquidity risks at financial institutions. On May 3, 2016, Federal banking agencies took a large step towards more closely monitoring and regulating the liquidity positions of financial institutions by moving forward with a proposed rule to implement the Net Stable Funding Ratio (NSFR) for large and internationally active banking organizations. The action follows the Financial Stability Oversight Council’s (FSOC) release on Thursday, April 21, 2016 urging regulatory action to address liquidity issues faced by managers of pooled investment funds, separately managed accounts, and hedge funds. The action comes at a time when policymakers and market participants continue to assess shifting liquidity levels in bond markets and differences in cross-border implementation of post-crisis regulatory policies.
The NSFR proposed rule, follows a recommendation by the Basel Committee on Bank Supervision (BCBS) which has yet to be adopted by foreign counterparts. It holds far reaching implications for both domestic institutions and foreign banking organization (FBOs) doing business in the U.S. as well as asset managers and other non-bank financial institutions deemed systemically significant by the FSOC. The rule, as proposed, would directly impact liquidity risk management practices, regulatory reporting, and resolution planning at financial institutions covered by the rule. It would present direct implications for asset managers and central counterparties who deal with financial institutions covered by the rule. It will also present direct implications for banks with large derivatives books or high levels of repo transactions.