(MENAFN - AFP) The Federal Reserve on Thursday proposed new liquidity rules for banks that are tougher than the international Basel III standards, aiming to address industry weaknesses exposed by the financial crisis.
The Fed's proposed "liquidity coverage ratio" seeks to ensure that banks can withstand periods of extreme stress in financial markets by forcing them to hold a higher level of high-quality assets than they have in the past.
That would help ensure they can remain on their feet when the funding market for banks suddenly dries up in a crisis, as happened in 2008, when governments were forced to step in and prop up financial institutions.
"Liquidity is essential to a bank's viability and central to the smooth functioning of the financial system," Fed Chairman Ben Bernanke said, introducing the new rules.
"The proposed rule would, for the first time in the United States, put in place a quantitative liquidity requirement that would foster a more resilient and safer financial system in conjunction with other reforms."
Fed Governor Daniel Tarullo characterized the new liquidity coverage ratio (LCR) rules as the "super-equivalent" to the standards set by the Basel Committee, a group of leading central bankers who began in 1988 to establish capital rules for banks to strengthen the global financial system.
It requires the largest banks to meet the LCR 100 percent standard sooner than the Basel III agreement's 2019 deadline, and has tighter definitions of what constitutes high quality liquid assets, he said.
The proposal suggests US banks, because of tighter capital requirements and enforcement since the crisis, are able to meet the shortened timeframe.
Janet Yellen, the Fed vice-chair nominated to replace Bernanke from February 1, gave her firm endorsement of the new rules in a conference call.
"I strongly support the proposition," she said.
The Fed is putting the proposed rules up for public comment for 90 days, after which it could put them into effect.