Agencies aim to unite US with Basel liquidity risk standards

US regulatory authorities yesterday released proposed guidance on contingent funding and liquidity risk in a bid to bring US financial institutions into alignment with international liquidity standards.

In a consultation paper released jointly by the Office of the Comptroller of the Currency, the Federal Reserve Board, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision and the National Credit Union Administration, the US agencies re-emphasised "the importance of cashflow projections, diversified funding sources and a well-developed contingency funding plan" as primary tools for measuring and managing liquidity risk.

Formally titled Interagency guidance on funding and liquidity management, the consultation brings US principles into line with the Basel Committee on Banking Supervision's recently released Principles for sound liquidity risk management and supervision.

Although the new document mainly covers old ground, it also provides more detail on some proposals - the active management of intraday liquidity and collateral, the maintenance of adequate levels of highly liquid marketable securities free of legal or regulatory impairments that can be used to meet liquidity needs in stressful situations, and the establishment of comprehensive contingency funding plans.

Supervisors will then "assess these critical elements in their reviews of an institution's liquidity risk management process in relation to its size, complexity and scope of operations".

Institutions will also be required to stress test regularly for a variety of firm-specific and market-wide events across multiple time horizons to identify sources of liquidity strain, and should be able to calculate all of their collateral positions on an intraday and overnight basis.

While many of the statutes are similar to existing US liquidity risk mandates, the guidance seeks to better marry current funding measures with those thrashed out by the Basel Committee in response to the lessons of the financial crisis.

When finalised, the guidance will apply to all US domestic financial institutions, including banks, thrifts and credit unions. Comments must be submitted to firms' respective regulators within 60 days.

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