The following post comes to us from Dan Ryan, Financial Services Advisory Leader at PricewaterhouseCoopers LLP, and is based on a PwC publication.

The US Liquidity Coverage Ratio (“LCR”) debuted in October 2013 when the federal banking agencies – Federal Reserve, FDIC and OCC (“Agencies”) – jointly released their proposal. Although the industry had expected the US LCR to largely mirror the Basel Committee on Banking Supervision’s (“BCBS”) proposal that was finalized earlier, the US proposal came out quite differently.[1] This difference between expectations and reality is reflected in the 83 letters submitted during the US proposal’s comment period that closed on January 31, 2014.

The comments put forth by the industry raise two broad matters – the definitions and component characteristics of the LCR, and the timing and operational requirements of the LCR’s implementation. Based on submitted comments, we believe the Agencies are likely to adjust several provisions of the LCR proposal by (a) including municipal securities in the definition of High Quality Liquid Assets (“HQLA”), (b) excluding government-sponsored enterprise (“GSE”) debt from the 40% cap on Level 2 HQLA, (c) capping outflow rates for secured municipal deposits, and (d) requiring contractually binding agreements for the provision of operational services associated with operational deposits (as opposed to the deposits themselves).

We also believe the Agencies will finalize the LCR during the second quarter of 2014, thereby giving firms time to implement it by the proposed effective date of January 1, 2015. However, the January 1^st deadline may be pushed out if the regulators agree with implementation concerns raised by the comments.

Although Intermediate Holding Companies (“IHCs”) of foreign banking organizations were excluded from the LCR proposal, they still need to implement the LCR as part of their compliance with the US’s Enhanced Prudential Standards (“EPS”) that were finalized in February 2014. Therefore, we expect a separate LCR proposal for IHCs imposing requirements that will be largely identical to those applicable to US Bank Holding Companies (“BHCs”). However, more importantly in the near term, it is unclear what the Federal Reserve’s expectations will be for the LCR as part of the IHC implementation plans that must be filed by January 1, 2015.[2]

[1] See PwC’s Regulatory Brief, Liquidity coverage ratio: Another brick in the wall (October 2013).

[2] See PwC’s First Take: Enhanced Prudential Standards (February 2014).

The full and original post was published by PricewaterhouseCoopers LLP in April 2014 and is available here.