To Whom it May Concern:
The Bank Policy Institute[1] appreciates the opportunity to comment on the discussion paper
issued by the Bank of England and the Prudential Regulatory Authority on the usability of liquid assets.[2] Given the importance of this topic, BPI is responding to the discussion paper because while many of the member firms are domiciled in the U.S., they have subsidiary entities subject to PRA jurisdiction. As a result, some of the references to rules and regulations contained herein are those of regulatory bodies other than the PRA.
Banks’ ability to utilize their stock of liquid assets to support the economy in times of stress is
fundamental to the construct of the bank liquidity framework, including the Liquidity Coverage Ratio standard, which set forth a formative intent that “[d]uring periods of stress, however, it would be entirely appropriate for banks to use their stock of HQLA, thereby falling below the minimum.”[3] As the discussion paper properly notes, the onset of the COVID pandemic corresponded with a reluctance of banks to utilize their liquid assets despite statement of intent by national regulators to permit banks to drop below an LCR of 100%.[4] A recent Federal Reserve working paper similarly found that when faced with the liquidity stress of COVID-19, banks did not respond by using their stocks of HQLA. In fact, the liquidity positions of large bank holding companies improved and they increased their LCR percentages by about 10 basis points,[5] in part due to defensive actions that were taken at the onset of the crisis.
The reasons why banks have maintained liquidity levels above their regulatory minimum
requirements, and would likely do so again, are complex and interconnected. Regulators have long stated that it is desirable for banks to utilize their stocks of liquid assets during times of stress and BPI supports efforts to increase the likelihood of such actions. However, while theoretically the framework would allow banks to use their liquid assets and drop below an LCR of 100% when faced with liquidity stress, several practical considerations disincentivize banks from taking such actions. Inefficiencies in the existing regulatory liquidity framework to facilitate the utilization of liquidity buffers can result in the need for government intervention to support the flow of credit and liquidity in a market-wide stress event. This was evidenced during the COVID-19 crisis, whereby swift government intervention occurred through the establishment of government-sponsored funding facilities and interim capital and liquidity regulatory relief actions throughout March 2020 to May 2020 in order to alleviate liquidity and funding
pressures across market participants and support the economy.
Our comment letter is focused on those areas that are most impactful to the broad universe of
banks subject to these liquidity regulations that impede firms from using liquidity buffers. Section II of our letter highlights several factors that can prevent institutions from using their existing HQLA and Section III contains our recommendations to modify the framework and thereby improve the usability of liquid assets. Some of these recommendations would entail making changes to the underlying LCR framework and we would therefore encourage the Basel Committee and its member institutions to consider these LCR adjustments to better allow HQLA to function as intended in times of stress. We believe that the proposed modifications we have detailed herein would ensure that global regulators have an effective framework that can be enacted during periods of stress in order to efficiently support banks’ ability to utilize liquidity buffers in stress.
To read the full comment letter, click here, or click on the download button below.
[1] The Bank Policy Institute is a nonpartisan public policy, research and advocacy group, representing the nation’s leading banks and their customers. Our members include universal banks, regional banks and the major foreign banks doing business in the United States. Collectively, they employ almost 2 million Americans, make nearly half of the nation’s small business loans, and are an engine for financial innovation and economic growth.
[2] Bank of England and Prudential Regulatory Authority, Discussion Paper 1/22, The prudential liquidity framework: Supporting liquid asset usability (March 31, 2022).
[3] Basel Committee on Banking Supervision, Liquidity Coverage Ratio LCR20 Calculation (December 15, 2019) at 4.
[4] See discussion paper at 6
[5] Divisions of Research & Statistics and Monetary Affairs Federal Reserve Board, COVID-19 as a Stress Test: Assessing the Bank Regulatory Framework (March 2021) at 18, available at
https://www.federalreserve.gov/econres/feds/files/2021024pap.pdf.
