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    EBA Plans Next Stress Test for 2023, Issues Other Updates for Banks

    December 17, 2021

    The European Banking Authority (EBA) announced its decision to conduct the next stress test in 2023, reflecting the ongoing progress that European Union banks are making in strengthening their capital positions and the work to be done for the preparation of the next stress test exercise. EBA has communicated this decision to the European Parliament, the Council, and the Commission and plans to conduct its regular annual transparency exercise in 2022. EBA also published the final guidelines on the delineation and reporting of available financial means of deposit guarantee schemes and a report that monitors and evaluates the liquidity coverage requirements in the European Union. The guidelines on the delineation and reporting of deposit guarantee scheme available financial means shall apply from March 30, 2022.

    The deposit guarantee scheme guidelines set out that only funds that were originally contributed by credit institutions to the ex-ante funds of deposit guarantee schemes will count toward reaching the target level of said funds. These clarifications aim to prevent a situation wherein a deposit guarantee scheme could meet the target level by taking out a loan, instead of raising contributions from the industry. The guidelines also expand the current reporting requirements from deposit guarantee schemes to EBA, with a view for EBA to publish more extensive information on deposit guarantee scheme funding going forward. The guidelines will extend the reporting requirements from deposit guarantee schemes to EBA to reflect the clarified concept of available financial means (AFM) proposed earlier in the guidelines. The final guidelines clarify that available financial means (AFM) have two subsets: Qualified AFM (QAFM) and Other AFM. They also introduce new reporting requirements of deposit guarantee schemes to EBA, most notably the reporting of outstanding liabilities of deposit guarantee schemes and high-level information on alternative funding arrangements that are in place. The reporting requirements now include loans between deposit guarantee schemes and exclude unclaimed repayments. The reported information will be published on the EBA website annually and should provide more transparency and comparability of the financial position of deposit guarantee schemes across the European Union. Given that a review of the Deposit Guarantee Scheme Directive (DGSD) has not yet been proposed and is still several years away from being negotiated and finalized, the guidelines provide such a clarification ahead of any such changes in the future, using the existing DGSD as a legal basis. The final guidelines replaced the approach on the allocation of recoveries to QAFM and other AFM with an approach that permits two alternatives, both of which better fulfill the aims of the guidelines. Also, the treatment of investment income with regard to QAFM has been simplified.

    The report on monitoring of liquidity measures finds that European Union banks have continued to improve their liquidity coverage ratio (LCR). The LCR of European Union banks stood at 176% in June 2021, materially above the minimum threshold of 100%; only one bank reported LCR levels below 100%. The extended access to additional liquidity via extraordinary central bank facilities supported the efforts of banks to maintain their LCR buffers. A more in-depth analysis of potential currency mismatches in LCR levels reveals that EU banks continue to hold materially lower liquidity buffers in some foreign currencies, in particular USD. This situation increases the banks’ vulnerability for disruptions in foreign exchange markets and may make them overly dependent on central bank foreign currency swap lines. EBA renews its urge, expressed in the previous reports, for the affected banks and supervisors to improve the situation. The report also focuses on the impact of the LCR on lending activities. The analysis suggests the possibility that banks are fronting a target for the LCR that is higher than the regulatory minimum and that, in some circumstances, this can represent as a driver of their lending policies.

     

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    Keywords: Europe, EU, Banking, CRD, CRR, Basel, Liquidity Risk, Guidelines, LCR, Reporting, DGSD, Deposit Guarantee Scheme, Deposit Guarantee Fund, Available Financial Means, Stress Testing, EBA

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