EBA published the second report on monitoring of the implementation of the liquidity coverage ratio (LCR) in EU. The report presents observations and main conclusions reached in the area of the use of certain liquidity mechanisms amid pandemic. It also presents the new implementation issues observed since the last assessment report and summarizes the effects of EBA guidance provided in the first report, which was published in July 2019. EBA plans to continue to monitor LCR implementation and extend monitoring to the net stable funding ratio or NSFR.
The report discusses:
- Liquidity issues during a crisis period, in the COVID-19 context. The report focuses on the use of liquidity buffers, guidance on unwinding mechanism waivers, recourse to central bank support, and additional outflows from derivatives. The report provides a policy discussion on the management of liquidity buffers under stress and builds on the regulatory expectation that the liquidity buffer in the LCR is designed to be used to meet net outflows under stress. This is to avoid contagion risk and ensure liquidity injection into the economy and financial system. The report argues that the use of liquidity buffers should not be penalized by the reaction of external or internal agents. These discussions build on the observations raised by some supervisors on the reluctance of banks to use their buffers during the COVID-19 episodes.
- New implementation issues. The report identifies certain issues for which guidance is provided to ensure a common understanding. The observed issues are with respect to the treatment of fiduciary deposits, LCR optimization risks, concentration of outflows beyond 30 days, Article 26 LCR DR on outflows with interdependent inflows, and Deposit Guarantee Scheme conditions for a 3% outflow rate in retail deposits. Based on both policy and legal views, the report provides guidance to banks and supervisors on how the conditions required for the mentioned treatment should be read and shows how competent authorities might still grant, within the Pillar 1 requirement, the application of this inflow cap waiver in a partial manner if they wish to ensure a minimum LCR buffer is held.
- Impact of previous guidance. EBA has noticed that its previous guidance has positively influenced the behaviors of banks, which shows the usefulness of this guidance. The report reviews the application of the guidance to identify excess operational deposits included in the first report and identifies that some competent authorities have used different ways of communication of the guidance. Some supervisors have also confirmed that they have observed that banks treat excess operational deposits in accordance with the EBA guidance. Competent authorities confirmed the EBA guidance to identify retail deposits excluded from outflows was being applied in practice.
In this report, EBA highlights that it will continue working on monitoring the implementation of the LCR in EU and will subsequently extend it to NSFR. Some topics are already work in progress. For instance, EBA has started to work on a common understanding for a methodology to assess the required below 3% run-off evidence for the application of a 3% outflow rate in stable retail deposits (Article 24(5) of the LCR DR). EBA will work on the notifications to be received in application of Article 26(2) of the LCR DR on outflows with interdependent inflows in the context of the guidance included. EBA will also monitor the application of the guidance on unwinding waivers. Other important topics are LCR by currencies subject to separate reporting (significant currencies) and HQLA diversification in LCR, as already announced in the first report.
Keywords: Europe, EU, Banking, LCR, COVID-19, Deposit Guarantee Scheme, Basel, NSFR, EBA
Leading economist; commercial real estate; performance forecasting, econometric infrastructure; data modeling; credit risk modeling; portfolio assessment; custom commercial real estate analysis; thought leader.
Previous ArticleEU Papers Examine NPL Resolution Strategy After Pandemic
The European Commission (EC) published a report summarizing responses to the targeted consultation on the supervisory convergence and the single rulebook in the European Union (EU).
The Office of the Superintendent of Financial Institutions (OSFI) published an update on the discussion paper that intended to engage federally regulated financial institutions and other interested stakeholders in a dialog with OSFI, to proactively enhance and align assurance expectations over key regulatory returns.
The European Central Bank (ECB) published its opinion on a proposal for a regulation on European green bonds, following a request from the European Parliament.
The Advisory Scientific Committee (ASC) of the European Systemic Risk Board (ESRB) published a report that explores the expected impact of digitalization on provision of financial and banking services, and proposes policy measures to address the risks stemming from digitalization.
The European Banking Authority (EBA) announced that the guidelines on the reporting and disclosure of exposures subject to measures COVID-relief measures shall continue to apply until further notice.
The Swedish Financial Supervisory Authority (FI) announced that the capital adequacy reporting as at December 31, 2021 must be done by February 11, 2022.
The Central Bank of the Philippines (BSP) issued communications covering developments related to online lending platforms, open finance framework and roadmap, and on the expected regulations in the area sustainable finance.
The Board of Governors of the Federal Reserve System (FED) published the final rule that amends Regulation I to reduce the quarterly reporting burden for member banks by automating the application process for adjusting their subscriptions to the Federal Reserve Bank capital stock, except in the context of mergers.
The European Banking Authority (EBA) published its assessment of risks through the quarterly Risk Dashboard and the results of the Autumn edition of the Risk Assessment Questionnaire (RAQ).
The Malta Financial Services Authority (MFSA) updated the guidelines on supervisory reporting requirements under the reporting framework 3.0.