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Federal Register / Vol. 86, No. 123 / Wednesday, June 30, 2021 / Proposed Rules
615.5134, does not consider how expected cash inflows would affect the banks liquidity reserve requirement.
Outside of CFP stress analysis discussed below, FCAs existing liquidity framework views the discounted market value of assets held in the liquidity reserve and supplemental buffer as the only source of liquidity during a liquidity event.33
However, in a liquidity event, certain borrowers will still be making payments on their loans, allowing money to flow into the institution that can be used to support ongoing operations. Cash inflows from sources other than the liquidity reserve typically include payments from wholesale and retail borrowers and coupon and scheduled principal payments from securities not included in the liquidity reserve.34
The CFP requirement at 615.5134f allows System banks to consider inflows when analyzing how much contingent liquidity they must hold under a 30-day acute stress scenario. However, for the purposes of the CFP, System banks have considerable discretion to determine the assumptions pertaining to the amount of inflows that will offset potential outflows. To evaluate this further, we are seeking comment to determine if we should incorporate inflows into the existing FCA liquidity framework.
7. How should FCA incorporate the uncertainty of cash inflows into System banks liquidity reserve requirements?
8. What would be an appropriate discount percentage to apply to the different types of inflows such as payments from wholesale and retail borrowers, payments from securities not included in the liquidity reserve?
9. What type of operational changes such as data elements, general ledger requirements, and systems would be required to accurately capture inflow and outflow information to calculate liquidity ratios on a daily or monthly basis?

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Stability of a Banks Balance Sheet The amount of liquid assets that a bank must maintain is generally a function of the stability of its funding structure, the risk characteristics of the 33 The discounts applied to the assets held for liquidity in FCAs regulations approximate the cost of liquidating investments over a short period of time during adverse situations. The mechanism of discounting assets is designed to accurately reflect true market conditions. For example, FCA
regulations assign only a minimal discount to investments that are less sensitive to interest rate fluctuations because they are exposed to less price risk. Conversely, the discount for long-term fixed rate instruments is higher because they expose FCS
banks to greater market risk.
34 See FDICs Liquidity Risk Management Standards. Inflow amounts are defined at 12 CFR
329.33.

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balance sheet, and the adequacy of its liquidity risk measurement program.
System banks provide funding to their affiliated associations through the direct note which is a significant portion of the banks assets. The banks direct note assets are impacted by the funding and liquidity demands of their affiliated associations. However, System banks directly control the mix of funding for these assets, as well as the risk characteristics of other assets acquired.
System banks issue System-wide debt securities as the primary source for funding loans and investments. As part of the examination process, FCA
evaluates how each banks debt structure helps limit liquidity risks. For example, if a bank funds its balance sheet wholly with short-term debt, the resulting large amounts of debt maturing each week would cause the bank to be vulnerable to market disruptions and liquidity risk. Therefore, debt maturities should be structured in a manner that they are extended and align with the tenor and composition of the banks assets. In addition, debt maturities should ensure longer-term stable funding.
FCAs existing liquidity framework does not directly address the stability of a banks balance sheet and does not require compliance with specific debt structure ratios. To evaluate this further, we are seeking comment to determine if we should add requirements regarding the structure of a banks balance sheet into the existing FCA liquidity framework.
10. How should FCA amend its liquidity regulations to strengthen the stability of the balance sheet structure at FCS banks?
11. Under what circumstances might it be appropriate for FCAs liquidity framework to better address funding methods such as discount notes and short funding?
Marketability of the Supplemental Liquidity Buffer Currently, investments held in a banks liquidity reserve must be marketable in accordance with the criteria in 615.5134d. However, investments held in the supplemental liquidity buffer are not subject to the same marketability standard.35 Thus, 35 Assets held in the supplemental liquidity buffer are not subject to the marketability standard in 615.5134d. However, a System bank must be able to liquidate any qualified eligible investment in its supplemental liquidity buffer within the liquidity policy timeframe established by the banks liquidity policy at no less than 80 percent of its book value. Assets having a market value of less than 80 percent of their book value at any time must be removed from the supplemental buffer. See 615.5134e.

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there is the potential that the supplemental liquidity buffer may include investments that are not marketable or liquid under certain circumstances. To evaluate this further, we are seeking comment to determine if we should hold investments in the supplemental liquidity buffer to the same or similar marketability standards as assets in the liquidity reserve.
12. Should FCA apply the criteria for marketable investments in 615.5134d to assets that FCS banks hold in their supplemental liquidity buffer? If yes, why? If no, what criteria should FCA adopt to address its concerns about the liquidity and marketability of assets in the supplemental liquidity buffers of FCS
banks when access to the markets are becoming impeded, and why?
Money Market Instruments and Diversified Investment Funds The existing liquidity framework allows certain money market instruments and diversified investment funds to be included as Level 1 reserves at 615.5134b. The FBRAs decided not to include similar instruments in the LCRs HQLA framework, such as mutual funds and money market funds.36 The FBRAs stated that certain underlying investments of the investment companies may include high-quality assets, however, similar to securities issued by many companies in the financial sector, shares of investment companies have been prone to lose value and become less liquid during periods of severe market stress or an idiosyncratic event involving the funds sponsor. Additionally, Securities and Exchange Commission SEC rules regarding money market funds may also impose some barriers on investors ability to withdraw all their funds during a period of stress.37
Certain money market instruments exhibited liquidity stress during the 2008 financial crisis and the economic shock in March 2020 caused by the 36 FCA defined money market instruments to include short-term instruments such as 1 Federal funds, 2 negotiable certificates of deposit, 3
bankers acceptances, 4 commercial paper, 5
non-callable term Federal funds 6 Eurodollar time deposits, 7 master notes, and 8 repurchase agreements collateralized by eligible investments as money market instruments. 83 FR 27486, 27489
June 12, 2018. Of the seven items, the FBRAs only allow Federal funds to be included in Level 1
HQLA. See supra footnote 1. Federal funds represent a small amount of the Systems cash and liquidity included in Level 1 money market instruments.
37 See SEC, Money Market Fund Reform;
Amendments to Form PF, 79 FR 47736 August 14, 2014.

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