Liquidity Coverage Ratio Requirement Increases Cost of Securitization for U.S. Banks

Abstract

In September 2014, the Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation (FDIC) adopted a final rule regulating the liquidity risk of banks in the United States. The Final Rule will impact banks participating in the securitization market in many ways and the authors summarize three of them in this article. First, the Final Rule will increase the cost of unfunded commitments extended by a bank in a securitization credit facility transaction. Second, the Final Rule will increase the costs incurred by a bank that sponsors a securitization of its own assets. Third, the Final Rule will decrease a bank’s appetite to invest in structured finance securities. It remains to be seen whether the new regulation designed to improve the liquidity risk profile of banks will reduce overall market liquidity by steering banks away from the securitization market.

TOPICS: Fixed income and structured finance, legal/regulatory/public policy, credit risk management