ABA Concerned Over Potential Changes to Bank Liquidity Rules

American Bankers Association (ABA) has urged caution if regulators decide to move forward with new bank liquidity requirements or amendments to liquidity-related reporting rules.

In recent speeches by senior official’s, the OCC’s Michael Hsu and the Federal Reserve’s Michael Barr have suggested regulators are considering revising bank liquidity rules in the wake of the collapse of Silicon Valley Bank and Signature Bank.

However, in a letter to the Federal Reserve, FDIC and OCC, the ABA stated those failures were largely idiosyncratic and primarily the result of inadequate risk management.

Therefore, these “preventable and controllable” circumstances should not result in an overhaul of the prudential framework or the application of one-size-fits-all requirements, according to the association.

The ABA also expressed concern about regulators’ focus on uninsured deposits as a proxy for liquidity risk because the term “uninsured deposits” covers a diverse set of deposits and products.

For example, this term could include deposits from retail, business, state and local government, agricultural, commercial and institutional customers.

As a result, ABA has called the proposed approach “simplistic and undifferentiated” and instead recommend that regulators adopt a more granular approach to insured deposits.

According to the association, this would avoid the penalization of certain banks, depositors and activities that are critical to economic and market functions and the potential reallocation of deposits, including to venues outside the banking system.

ABA said in its statement: "‘Uninsured deposits,’ as currently provided by the Call Report is not granular enough to conduct these critical assessments and should not be the basis on which liquidity regulations or other policies hinge.”

If regulators decide to pursue amendments to bank liquidity requirements, ABA has urged them to take the optional step of issuing an Advance Notice of Proposed Rulemaking.

This would allow sufficient time to allow detailed comment from the industry as well as its customers, investors and policymakers on whether the changes are needed.

ABA added banking agencies will also need more information than is currently available to evaluate the factors related to deposit flows, stability and duration of deposits, depositor behavior and the relevance of deposit insurance for large corporate and institutional investors.