Large Bank Liquidity Continues to Strengthen

29 May 2020
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The past 10 years have seen a growing emphasis on the ability of large banks to maintain sufficient amounts of liquid resources to meet ongoing financial demands from depositors, creditors, and others.  The recent pandemic has underscored the importance of liquidity at large banks as their borrowers have needed significant amounts of cash, on relatively short notice, to help them meet their immediate financial obligations.  In this post, we briefly review the facts on the liquidity position of Forum members and show that over the past year, Forum members have further strengthened their liquidity position by over $160 billion and maintain liquid resources well in excess of regulatory requirements.

The U.S. banking regulators’ liquidity coverage ratio (LCR) requires large banks to hold certain amounts of high-quality liquid assets, or “HQLA,” to meet short-term liquidity needs, such as the need to provide cash to a corporate borrower as the result of an unscheduled draw on a pre-existing credit line.  HQLA is comprised of cash and other “near cash” alternatives, such as deposits at the Federal Reserve and other high-quality government securities that can be monetized quickly at low cost.  As we discussed in a previous post, in the early stages of the pandemic, Forum members provided an unprecedented amount of corporate lending in response to an unprecedented demand for credit.  Much of this lending was provided in the form of draws on existing credit lines, necessitating that Forum members provide their customers with much-needed liquidity to meet payroll and other financial obligations. 

Source: Forum Members’ Q1 2020 Liquidity Coverage Ratio Disclosures

Recently, all Forum members have disclosed their HQLA levels as of the end of the first quarter of 2020.  Together, as shown in Figure 1, Forum members grew their overall liquidity position by over $160 billion since the first quarter of 2019 from roughly $2.2 trillion to $2.4 trillion.  In addition, this substantial increase in liquidity came at a time when liquidity demands on the banking sector were high as a result of the pandemic.  The high level of liquidity at Forum members is a tangible sign of their overall strength and resiliency as well as their ability to serve their clients and the economy during a period of need.  In addition to the high dollar amount of HQLA resources, Forum members also maintain significant amounts of liquid resources relative to their potential liquidity needs.  As part of the LCR regulation, large banks are required to calculate the amount of liquid resources they might need over a 30-day period of stress.  The bank’s HQLA holdings must be at least as large as the computed stress liquidity need.  Together, and as shown in Figure 1, Forum members maintain HQLA that is 117% of the stress liquidity need.  Accordingly, Forum members maintain robust levels of liquidity to meet the needs of businesses and households.

The recent pandemic has placed a special emphasis on the importance of liquidity for financial institutions as they provide liquidity to meet the quickly evolving needs of their clients.  Forum members have met those needs and continue to build liquidity strength by increasing the amount of their HQLA holdings.  The liquidity position of Forum members is an important sign of their resilience and their ability to support businesses, households and the economy.

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