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Economic Brief

January 2016, No. 16-01

Understanding the New Liquidity Coverage Ratio Requirements

Mark House, Tim Sablik and John R. Walter

In 2014, U.S. financial regulators introduced new liquidity coverage ratio requirements for qualified banking institutions. This regulation, based on guidelines from the Basel III accord, requires that banks hold minimum levels of liquid assets to withstand a period of financial stress. It is a response to the financial crisis of 2007–08, during which many banks found themselves suddenly cut off from short-term funding. But the impact of liquidity requirements remains an area of ongoing debate and economic research.

Additional Resources

Allen, Franklin, "How Should Bank Liquidity Be Regulated?" Presentation at the Federal Reserve Bank of Atlanta's 2014 Financial Markets Conference on "Tuning Financial Regulation for Stability and Efficiency," April 15-16, 2014.

Bech, Morten L., and Todd Keister, "Liquidity Regulation and the Implementation of Monetary Policy," Bank for International Settlements Working Paper No. 432, October 2013.

Board of Governors of the Federal Reserve System, press release summarizing the Fed's final rule requiring the largest, most systemically important U.S. bank holding companies to strengthen their capital positions, July 20, 2015.

Carlson, Mark A., "Lessons from the Historical Use of Reserve Requirements in the United States to Promote Bank Liquidity," Board of Governors of the Federal Reserve System Finance and Economics Discussion Series No. 2013-11, January 24, 2013.

Diamond, Douglas W., and Anil K. Kashyap, "Liquidity Requirements, Liquidity Choice, and Financial Stability," Manuscript, Revised November 2015. (Working paper version)

Ennis, Huberto M., and David A. Price, "Basel III and the Continuing Evolution of Bank Capital Regulation," Federal Reserve Bank of Richmond Economic Brief No. 11-06, June 2011.

Grochulski, Borys, and Wendy Morrison, "Understanding Market Failure in the 2007–08 Crisis," Federal Reserve Bank of Richmond Economic Brief No. 14-12, December 2014.

Grochulski, Borys, and Yuzhe Zhang, "Optimal Liquidity Regulation with Shadow Banking," Federal Reserve Bank of Richmond Working Paper No. 15-12R, Revised November 5, 2015.

Liebmann, Eva, and Joe Peek, "Global Standards for Liquidity Regulation," Federal Reserve Bank of Boston Current Policy Perspectives No. 15-3, July 2015.

"Liquidity Coverage Ratio: Liquidity Risk Measurement Standards," Federal Register, vol. 79, no. 197, October 10, 2014.

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