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. For the purpose of LCR, banks shall continue to value such government securities reckoned as HQLA at an amount not greater than their current market value (irrespective of the category under which the security is held-that is, Held to Maturity/HTM, Available for Sale/AFS, or Held for Trading/HFT). The RBI Circular also specifies the incremental transitional requirements for the use of additional 2% of government securities as Level 1 HQLA between Apand April 01, 2020.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. It has been decided to permit banks to reckon an additional 2.0% government securities held by them under FALLCR within the mandatory SLR requirement as Level 1 HQLA for the purpose of computing LCR, in a phased manner. Within the mandatory SLR requirement, Level 1 HQLA also includes government securities to the extent allowed by RBI under Marginal Standing Facility (MSF) and under Facility to Avail Liquidity for Liquidity Coverage Ratio (FALLCR). At present, the assets allowed as the Level 1 High Quality Liquid Assets (HQLAs) for the purpose of computing the LCR of banks include government securities in excess of the minimum Statutory Liquidity Ratio (SLR) requirement.

High quality liquid assets