With a name like Liquidity Coverage Ratio, you'd be forgiven if you mistake the big news in banking for a Labor Day barbecue strategy to ensure you don't run out of beer. After all, liquidity is as important to a healthy banking system as libations are to a cookout.
The Liquidity Coverage Ratio is a new rule the Federal Reserve is expected to approve Wednesday. It will dictate how much banks need to hold in reserves to meet their cash needs for 30 days. Banks won't have to sit on piles of cash, though. The rule will describe the types of assets a bank can include in its calculation and how much it needs. The goal is to ensure a safer banking industry after the taxpayer bailouts six years ago.
Only the biggest of the big banks will be subject to the new requirements. Some critics argue regulators themselves have allowed these giant banks to grow into too big to fail financial institutions, forcing these rule makers to invent new guidelines to protect taxpayers from the potential of future bailouts. These regulators suffered from a failure of financial fiasco imag
ination in the years leading up to the Great Recession. They continue hoping to shore up confidence that this time they have it right.
Key for the bankers is what assets will the rule allow them to use to calculate their liquidity ratio. U.S. government bonds seem obvious. But other government debt, such as IOU's from state and local governments may not be included in Wednesday's final rule. These municipal bonds are important sources of money for school districts, sewer repairs and other local public investments. Limiting bank's ability to count these loans as collateral against an economic emergency could lead to fewer banks buying these bonds. Fewer bond buyers leads to higher interest rates for municipal governments. Taxpayers would bear those higher borrowing costs; the same taxpayers Wednesday's rule is designed to protect.
Tom Hudson, financial journalist, hosts "The Sunshine Economy" on WLRN-FM in Miami, where he is the vice president of news. He is the former co-anchor and managing editor of "Nightly Business Report" on public television. Follow him on Twitter @HudsonsView.