Level 1 assets are considered the most liquid assets and enter the numerator with no haircut. We believe we have made the most of the information that is publicly available. The Fed did require the company to submit the FR-2052A liquidity monitoring report, but that is not publicly available. The caveat is that we were limited to public reports-the company’s 10-K Y-15 Systemic Risk Report call reports and investor presentations. This brief note describes our calculations (Figure 2) and provides initial conclusions. The LCR as currently written does not distinguish securities by their maturity or recognize that a bank may be reluctant to take losses by selling them. To manage the run, the bank would have needed more of the most liquid HQLAs-reserve balances or short-term Treasuries-not more of the long-dated stuff. The bank might have faced the same run after depositors became concerned about the realized losses on Treasuries and unrealized losses on MBS. If faced with the LCR rule two or three years ago, they could have simply shifted from long-dated MBS to long-dated Treasuries-bringing their LCR in compliance while staying extraordinarily exposed to rising rates. To be sure, compliance with the LCR alone would not have saved SVB’s management from its mistakes managing interest-rate risk in the bank’s massive, long-dated portfolio of agency mortgage-backed securities (MBS). To get to compliance, the bank would have needed far more high-quality liquid assets-$18 billion more to get to a 100% LCR, and $36 billion more to get to the 125% LCR that US global systemically important banks maintain on average. The bank’s managers would have had to manage liquidity risk very differently. The market, not just bank supervisors, may have been more focused on the risks it faced. Moreover, if the bank had been subject to the rule, it would have been required to publicize more data about its liquidity risks. Even under its existing regulatory framework, SVB’s supervisors should have identified the liquidity risks the company faced due to its high concentration to, and run-inducing dependence on, a specific type of corporate depositor. Supervisors shouldn’t just react when a bank breaches a limit-they should act when limit breaches become foreseeable. Of course, if the bank were subject to the rule, its supervisors would not have allowed its LCR to fall so far. This result suggests that the 2019 tailoring rule was complicit in the run and failure at SVB. We reviewed SVB’s public financials and concluded that its LCR would have been 75% at the end of 2022, substantially below the threshold.
SVB would have been subject to that ratio because its foreign exposures met the threshold.
Under the original 2014 version of the rule, banks with $250 billion in assets or $10 billion in foreign exposures had to maintain their LCR ratios above 100%. The LCR rule requires banks to hold sufficient high-quality liquid assets (HQLA) to manage expected net cash outflows in a 30-day stress scenario.
Their 2019 “tailoring” rule is here, a simple chart is here. Less than four years ago, the US bank regulators, following an Act of Congress, ruled that most banks with between $50 billion and $250 billion in assets would no longer be subject to the liquidity coverage ratio, or LCR, or other enhanced prudential standards that they apply to the most systemically important banks.
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