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Liquidity Coverage Ratio

In September 2014, the U.S. banking agencies adopted final rules implementing a liquidity coverage ratio ("LCR") requirement that will test a bank's ability to withstand "liquidity stress periods" (the "Final U.S. LCR"). The specific objective of the LCR rules is to ensure that a bank has enough high quality liquid assets ("HQLA") that can be immediately converted into cash to meet its liquidity needs for a 30-day stress period.

The Basel Committee on Banking Supervision initially published international liquidity standards in December 2010 as part of the Basel III reform package and revised those standards in January 2013 (the "Final Basel LCR Guidelines"). In October 2013, the U.S. banking agencies proposed rules to implement an LCR requirement in the United States (the "U.S. Proposed LCR").

The Final U.S. LCR implements the LCR requirement in a manner mostly consistent with the Final Basel LCR Guidelines - with some modifications to reflect the characteristics and risks of specific aspects of the U.S. market and the U.S. regulatory framework. However, the Final U.S. LCR is more stringent than the Final Basel LCR Guidelines in several important respects.  

The Final U.S. LCR also implement the LCR requirement in a manner mostly consistent with the U.S. Proposed LCR but with some important modifications made in response to industry comment. An example of particular relevant to the securitization market relates to the treatment of unfunded commitments to special purpose entities ("SPEs"). The U.S. Proposed LCR would have assigned a 100% outflow amount to any unfunded commitment provided by a U.S. bank to a special purpose entity. However, the Final U.S. LCR applies a "look through" approach to determining outflow amounts for commitments to special purpose entities that do not issue securities or commercial paper and that are not consolidated subsidiaries of certain types of customers or counterparties of the bank.

The effective date for the Final U.S. LCR is January 1, 2015, and covered companies will be required to maintain a minimum LCR of 80% beginning on that date. However, the U.S. banking agencies have delayed implementation of the daily calculation requirement. With respect to daily calculation requirement:

Modified LCR holding companies will not be subject to the Final U.S. LCR in 2015, and will be required to calculate and maintain their LCR monthly starting January 1, 2016.

REGULATORY MATERIALS

United States

Basel Committee on Banking Supervision

European Union