U.S. regulators met on Wednesday to adopt rules for banks to hold enough easy-to-sell assets to keep them afloat during a crunch, after many were caught short of cash during the 2007-09 financial crisis.
The rules, a key plank of a global agreement to make big banks such as JPMorgan and Citigroup safer, are a new building block as regulators across the world work to make banks sturdier and head off a future meltdown.
"Liquidity squeezes were the agents of contagion in the financial crisis," Federal Reserve Governor Daniel Tarullo said. "The (new rule) makes such squeezes less likely by limiting large banks from taking on excessive liquidity risk."
The regulators also unveiled rules determining how much money - or margin - swaps buyers and sellers must set aside when they do trades outside central clearing houses, which makes them more risky than cleared derivatives trades.
The Fed board will vote on the rules in a public meeting on Wednesday and the Federal Deposit Insurance Corporation (FDIC) also will take a vote. The Office of the Comptroller of the Currency said it had already adopted both rules.U.S. regulators in October 2013 first proposed the liquidity rules, which were more stringent than the global agreement, with a shorter phase-in period for domestic banks.
The Federal Reserve said big U.S. banks would need to hold a total of about $2.5 trillion in highly liquid assets by 2017. The institutions would have a shortfall of about $100 billion if that threshold applied today, the Fed said.
Banks must maintain enough liquid assets on hand to survive a 30-day squeeze. Banks with more than $250 billion in assets will have to tabulate their liquidity needs every day, while smaller institutions will calculate theirs monthly.
Fed staff said they want to work on a plan to eventually include the most liquid municipal bonds in the asset buffer, although for now they will not count, something that has frustrated state and local government officials.
Global regulators also are working on an additional requirement that would force banks to calculate their liquidity needs over a full year, the so-called Net Stable Funding Ratio.
On top of that, the Fed is working on rules to rein in banks that heavily rely on short-term funding tools.Staff also recommended that the Fed repropose margin requirements for swap trades conducted outside clearing houses, which function as middlemen by taking on the risk that trading partners cannot deliver on their promises.
Swaps, which mushroomed during the pre-crisis boom, must now be routed through clearing houses but some are so complex that they are still not cleared, and the new rules set out how much money trading partners need to set aside to cover risk.
The margin rules largely followed a global agreement released in 2013. The U.S. proposal was somewhat stricter in its definition of large financial end users, agency staff said.