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April 23, 2015

Banks face challenges complying with LCR requirements

Many banks are making major changes as they take steps to comply with the liquidity coverage ratio, including selling off assets and running off deposits that do little to help them meet the requirement.

Building stronger banks
Regulators created the LCR in an effort to enhance bank stability by increasing their ability to withstand sustained outflows. Banks with at least $250 billion in consolidated assets or $10 billion in foreign banking assets, as well as subsidiaries of such financial institutions that have at least $10 billion in assets, must comply with this requirement.

In addition, banks with at least $50 billion in assets must meet a less stringent form of this ratio. The Federal Reserve, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation finalized these requirements in September 2014.

During that year, many banks - especially those with more than $250 billion in assets - spent a good part of 2014 preparing for the LCR and by the time the year was through, they had attained full compliance, according to SNL Financial.

These efforts put many banks ahead of the curve, as institutions bound by the more stringent ratio started complying Jan. 1, 2015, but do not have to fully meet the requirement until the start of 2017. Alternatively, those affected by the less severe LCR do not have to start meeting the requirement until the beginning of 2016.

Net interest margins
While many banks have made substantial progress toward meeting the LCR, many have encountered pressure on their net interest margins while changing up their balance sheets and deposits, SNL Financial reported. One good example is Huntington Bancshares, Inc.

In late January, chief financial officer Howell McCullough announced that his Columbus, Ohio-based banking holding company would encounter some pressure on its net interest margins as the financial institution worked toward meeting its LCR requirement by adding another $1 billion in high quality liquid assets, according to SNL Financial.

"We will see some pressure as we add securities for LCR," he stated during a call, the transcript indicated. "We'll add about $1 billion incremental, along with kind of having to repurchase about $100 million to $130 million a month from maturities. So those things will add to margin pressure as well."

As banks scrutinize their existing assets in preparation for meeting the LCR, they might benefit from working with Garnet Capital Advisors, an experienced loan sale advisory firm. If banks discover they have too much of a particular asset type, Garnet can work with these financial institutions to help them sell any such securities.