Federal Regulators Impose Tough New Rules For Banks

Federal banking regulators vote Wednesday on new rules that will require banks to increase their holdings of highly liquid assets. The new rules stem directly from problems experienced during the financial crisis, when banks found they couldn't quickly convert assets into cash.

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Today, federal regulators approved tough new rules for banks. Starting in 2016, banks of a certain size - the large ones - will have to make sure that more of their assets are liquid - able to be quickly turned into cash. And that was a big problem six years ago when the financial crisis hit. We're joined now by NPR's Jim Zarroli. Hey there, Jim.

JIM ZARROLI, BYLINE: Hi.

CORNISH: So explain to us how these rules change things.

ZARROLI: You know, banks already face capital requirements. In other words, if they're going to lend a certain amount of money, they have to have enough capital on hand to back it up. The regulations approved today apply to liquid capital. In other words, the government is saying for the first time that banks have to have a certain amount of high-quality assets on hand that they can get to as soon as they need it.

And this is really what's important here - things like treasury bills and cash - assets they can sell right away if they need to. And the big banks have to have enough of these assets on hand to fund themselves for a month. Smaller banks will also have to comply, but the liquidity levels they face are lower. And this will add up to a lot of money. The banking sector will have to keep $2.5 trillion in liquid assets on hand.

CORNISH: But why are regulators so concerned about this issue specifically - about how much liquid assets banks are holding on to?

ZARROLI: You know, banks, for decades, have been funding themselves by buying up a lot of very short-term debt. Sometimes the debt has to be paid back within a few hours or, you know, overnight. And this works out fine when times are good. But one of the things you saw in 2008 was that all of the sudden, the short-term debt markets shut down. The banks couldn't borrow anymore. And yet they had investors, and they had account holders that wanted to be paid off.

You may remember at the time, investment banks like Lehman Brothers and Bear Stearns kept saying, you know, we're actually in good shape. We have assets. We have enough assets to cover our liability. But it didn't matter because there was this cash flow crisis. The banks couldn't sell their assets fast enough for them to be of any help. You know, something like a commercial loan qualifies as an asset on your books, but you can't cash it in right away when you need to because you have to pay off an account holder who wants money.

CORNISH: So how did the big banks respond to these new requirements?

ZARROLI: You know, I think most banks understand that this was a problem. They understand that they needed to hold more liquid assets. And they've already been doing this on their own in recent years to some extent. Now, as a result of these regulations that were passed today, they'll have to hold even more. And this comes at a time when regulators - global and U.S. regulators have already been imposing other kinds of capital requirements on the banks. So, you know, banks have been pretty profitable in recent years, but this is going to cut into the money that they make. You know, the banks can afford it, but it's not going to make their shareholders happy.

So, you know, bottom line - I think they don't like this very much. Some of them argue that the regulators were defining liquid assets much too narrowly. If a bank holds a municipal bond, is that something that should be considered liquid? And there were other disputes, too. There was a lot of back-and-forth between the regulators and the banks. So I think the bottom line is the banks don't like the rules, but I think they've been tweaked to the point where they're are at least acceptable to them.

CORNISH: That's NPR's Jim Zarroli. Jim, thanks so much.

ZARROLI: You're welcome.

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