On May 5, 2020, the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation released an interim final rule amending the liquidity coverage ratio (“LCR”) rule, which will be effective immediately upon publication in the Federal Register.

The interim final rule impacts the LCR with regards to an institution’s participation in two facilities recently established to mitigate the economic impacts of the COVID-19 pandemic: the Money Market Mutual Fund Liquidity Facility (“MMLF”) and the Paycheck Protection Program Liquidity Facility (“PPPLF”).  Under the MMLF, eligible borrowers may receive non-recourse loans from the Federal Reserve Bank of Boston to purchase assets from money market mutual funds, and the purchased assets are posted as collateral for the loans.  Under the PPPLF, lenders eligible to originate loans to small businesses under the Paycheck Protection Program (“PPP”) may fund the loans by borrowing from a Federal Reserve Bank on a non-recourse basis and pledging the PPP loan as collateral.

The LCR rule requires institutions to calculate and maintain a certain amount of high-quality liquid assets to cover net cash outflows over a 30-day stress period.  Absent the interim final rule, loans under the MMLF and PPPLF could receive a non-neutral liquidity risk treatment even though the maturity of collateral for MMLF and PPPLF loans (which is the source of repayment) is the same as the maturity of the loan advanced, and a participating institution’s ability to settle such loans is not impacted by credit or market risk from collateral (since loans under the facilities are non-recourse).

To address this issue, the interim final rule excludes any inflow amounts or outflow amounts related to non-recourse loans under the MMLF and PPPLF from calculations under the LCR rule. In addition, collateral securing such loans are excluded from the calculation of an institution’s total net cash outflow amount. There is one exception: the adjustments to the LCR rule do not apply with respect to loans that are secured by instruments issued by the institution taking out the loan (or one of its consolidated subsidiaries).

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