US regulators tackle Wall Street’s reliance on volatile funding

Some Wall Street firms would have to further curtail their reliance on volatile short-term funding under a plan by US regulators  that seeks to ensure every big bank can endure months of financial stress.

Lenders would be required to depend on stable funding from sources such as deposits, according to a proposal written by the Federal Deposit Insurance Corp, the Office of the Comptroller of the Currency and the Federal Reserve.

Most megabanks already comply with the plan, which aims to guarantee each has sufficient funding to survive for as long as a year.

After years of new regulations governing banks’ capital, leverage and liquidity, the net stable funding ratio is among the last of the major constraints spurred by the 2008 financial crisis. The proposal – the US answer to a 2014 agreement among international regulators – would add to an earlier demand that lenders maintain a 30-day stockpile of easy-to-sell assets for shorter periods of stress. Both aim to ensure banks don’t have to scramble for funding in a meltdown.

Funding maintenance

The proposal would insist that banks maintain funding “including capital, long-term debt and other stable sources over a one-year window to account for the liquidity risks arising from their assets, derivatives and off-balance-sheet activities,” Federal Deposit Insurance Corp chairman

Martin Gruenberg

said.

The regulators would push lenders to rely less on repurchase agreements that expire quickly and were an industry mainstay in the years before the crisis.

Their plan focuses on 15 banks with more than $250 billion in assets or more than $10 billion in foreign exposures on their balance sheets.

A related proposal from the Fed will impose less-stringent requirements on 20 firms above $50 billion.

Almost all of the covered banks currently meet the proposed requirements set to take effect in 2018, according to regulators’ estimates, and the few that don’t are almost at the mark. The firms would have to report holdings quarterly, the regulators said.

Goldman Sachs and Morgan Stanley – New York-based investment banks that didn't have as much of a customer-deposit base as the commercial banks – have amassed deposits at a rapid clip since the 2008 crisis. Goldman Sachs stands to gain even more ground with its online bank acquired from General Electric last week. – (Bloomberg)