This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Big Bank Phobia: Liquidity, Stupid, Not Just Capital

The Basel III Liquidity Coverage Ratio (LCR) is designed to ensure "that a bank has an adequate stock of unencumbered high-quality liquid assets (HQLA) that can be converted into cash easily and immediately in private markets to meet its liquidity needs for a 30 calendar day liquidity stress scenario," according to the Basel Committee's statement in January.

The LCR will be introduced in January 2015, with a 60% minimum, rising by 10% a year until January 2019, when the requirement will be 100%.

The LCR is specifically designed to prevent immediate funding blowups of the type experienced by Bear Stearns and Lehman Brothers. The required coverage of liquidity needs for 30 days will allow enough time for regulators to implement an affected bank's approved orderly liquidation process, or "living will," as required by Dodd-Frank.


In his report on May 3, Mosby called liquidity "an underappreciated survival tool" for large banks, and said that "by the end of 2008, our Large Cap Banks' coverage of a retail run on the bank had fallen below 100%."

Of course, the government took very significant steps during the crisis to mitigate the risk of bank runs. The FDIC temporarily waived all limits on deposit insurance for most checking accounts, while eventually making permanent an increase in the basic deposit insurance limit to $250,000 from $100,000.

According to Mosby, "the coverage ratio for a retail run on the Large Cap Banks has risen to above 150%, the highest level we have seen in the 2000s." A retail run on deposits is a banker's worst nightmare, and it has been a very rare event in the United States for quite some time, with the FDIC taking a lot of the credit.

"Additionally, wholesale and institutional coverage ratios have improved from below 200% to around 400% today," according to Mosby.

The most important liquidity measure for banks when trying to curtail systemic risk is "a wholesale or institutional run on the bank," Mosby wrote.

"If a bank's wholesale or institutional coverage ratio falls too far and a bank's marketable assets begin to become less liquid, it could be forced to use the Fed to cover any significant loss of funding. Ensuring that the Large Cap Banks have excess liquidity is a component of getting the government out of making Large Cap Banks too Big to Fail."

The Bottom Line

So much of the "too big to fail" problem has been caused by the reliance of some banks on short-term funding, and the immediate drying up of that funding, from all sources, when things turn sour. The largest U.S. banks all have significant deposit bases now, including Goldman and Morgan Stanley, which converted to traditional bank holding company structures in 2008.

U.S. bank regulators can implement minimum short-term liquidity requirements in excess of those envisioned under Basel III, and they can do it well in advance of the planned implementation of the Basel III LCR.

And the Federal Reserve can incorporate liquidity stress testing into its next annual round of large-bank stress tests, beginning next March, showing Washington and the public that it is doing everything it can to prevent another industry bailout.

-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.
4 of 4

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 17,279.74 +13.75 0.08%
S&P 500 2,010.40 -0.96 -0.05%
NASDAQ 4,579.7890 -13.6380 -0.30%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs