The largest banks appear poised to take on higher-yielding, riskier mortgage-backed securities, or MBS, as the Federal Reserve unwinds its balance sheet.

In its liquidity coverage ratio, or LCR, disclosures released Aug. 28 and Aug. 29, the eight U.S. global systemically important banks reported room for MBS in their eligible pool of high quality liquid assets, or HQLA. All eight banks cleared the 100% minimum threshold for LCRs, with State Street Corp. reporting the lowest at 109% and Goldman Sachs Group Inc. reporting the highest at 128%.

The companies broke down their mixes of HQLAs into different buckets of assets in order of quality and volatility. Level 1 assets, such as excess reserves at the Fed and U.S. Treasuries, are regarded as high quality and liquid while Level 2 assets, like agency MBS, are regarded as slightly less stable and more volatile.

Steven Chubak, an analyst at Nomura Instinet, wrote in a report that the banks reported only about 14% of their total eligible HQLA in Level 2 assets, despite there being a regulatory cap of 40%. For the first time, the disclosures provided granular detail on exactly how the biggest banks calculated their LCRs. The federal regulators designed the LCRs to push banks to increase the amount of liquidity available in a time of stress and in 2016 required large banking organizations to publicly disclose detailed LCR data on a quarterly basis, effective the second quarter of 2017.

Bank of America Corp. appeared to hold the highest percentage of eligible Level 2 assets as a percentage of HQLA, at 25.3%, while State Street reported no eligible Level 2 assets at all.

Chubak suggested that this reflects capacity at the largest banks to take on agency MBS without impacting its LCRs. By leaving room to take on higher-yielding MBS, the big banks are standing ready to take on some of the agency securities that the Federal Reserve is expected to release this year when it begins unwinding its $4.5 trillion balance sheet.

Oliver Ireland, a former regulator and a current partner at law firm Morrison Foerster, said in an interview that while it's no surprise that banks are planning their liquidity around the Fed's unwinding, firms will face a tough challenge strategizing a remix of its liquid assets. Ireland said banks will likely need to think about HQLA and LCR rules work in tandem with leverage ratio and supplementary leverage ratio requirements. This could, for example, complicate banks hoping to swap more liquid assets with slightly less liquid but higher-yielding assets since risk-weights may make it harder to meet leverage requirements.

"If it's not an HQLA and you have a big capital charge, your incentive is to hold HQLA," Ireland said. "The regulatory structure is likely to create a market differential between things that are HQLAs and things that are not."

JPMorgan Chase & Co. had the lowest percentage of retail deposit outflows as a percentage of average total deposits, at 3.07%. As part of the LCR calculation, reporting banks project cash outflows and inflows during a stress scenario over a prospective 30 calendar-day period. Based on data reported in the disclosures and existing funding and deposit data, Morgan Stanley appeared to have the highest percentage of total cash outflows as a percentage of average total funding, at 33.48%, while Wells Fargo & Co. had the lowest, at 19.03%. Morgan Stanley and its financial holding company counterpart, Goldman Sachs, also had the highest percentages of retail deposit outflows as a percentage of average total deposits, at 18.10% and 18.97%, respectively.

The LCR remains a controversial regulatory requirement, as some argue that the ratio has "unalterable" monetary policy tightening effects. The U.S. Treasury Department has proposed narrowing the LCR to cover only internationally active banks and adjusting the cash flow calculation methodologies.

"I think the liquidity and the capital rules are probably in need of some rethinking," Ireland said.