The Bank of England (BoE) and the Prudential Regulation Authority (PRA) are seeking views, until June 30, 2022, on issues with respect to the usability of high-quality liquid assets (HQLA) held by banks.
The Basel Liquidity Coverage Ratio, or LCR, requires banks to hold a large enough stock of HQLA to meet their payment obligations in the case of a severe short-term stress. However, the Basel Committee on Banking Supervision (BCBS) and the Financial Stability Board (FSB) identified HQLA usability as an issue that may warrant further consideration, as part of their assessments of lessons learned from the COVID-19 stress. This discussion paper (DP1/22) is therefore also intended to inform BoE and PRA’s contribution to the ongoing work by BCBS on the evaluation of Basel III reforms. The discussion paper seeks views from from banks, wider market participants, and other stakeholders to improve understanding of of the ways in which banks feel constrained in their ability to draw on their stock of HQLA to meet unusual liquidity demands, the factors affecting this, and the improvements that can be made to allow banks to utilize their HQLA stock. The paper summarizes the prudential liquidity framework, offers evidence on the willingness and ability of banks to allow their stocks of HQLA to fall, and seeks views on the following aspects of HQLA usability:
- To what extent do banks feel constrained in their ability to draw on their stock of HQLA to meet unusual liquidity demands?
- To what extent is it desirable that banks feel more able to draw on their HQLA and how this could be achieved?
- How do the internal liquidity coverage ratio (LCR) targets of banks affect HQLA usability? To what extent would it be feasible and appropriate for banks to adjust or tailor internal targets for different scenarios?
- To what extent did authorities’ communications around HQLA usability during the COVID-19 stress support banks in using their HQLA?
- How much are banks concerned about regulatory reactions to initial falls in LCR and how much about potential regulatory views on the timeline for rebuilding HQLA stocks?
- What may be driving a potential stigma around banks allowing LCRs to fall?
- To what extent is it challenging for market participants to interpret the signals they receive from LCR-related disclosures when banks are facing liquidity pressures?
- What impact do regulatory liquidity disclosures have on HQLA usability and how might regulatory liquidity disclosures be improved?
- How do factors that drive LCR volatility contribute to concerns around HQLA usability?
- How does the practice of spot LCR disclosures affect HQLA usability in times of liquidity pressure?
- What would be the potential costs and benefits of changing prudential regulatory LCR disclosures to be more in line with the Basel (typically 90-day) averaging approach?
Related Link: Discussion Paper
Keywords: Europe, UK, Banking, Basel, ALM, Liquidity Risk, HQLA, LCR, Disclosures, Covid-19, HQLA Usability, BoE, PRA
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