Featured Product

    EBA Analyzes Impact of Unwind Mechanism of Liquidity Coverage Ratio

    November 19, 2020

    EBA published a report analyzing the impact of the unwind mechanism of the liquidity coverage ratio (LCR) for a sample of European banks over a three-year period, from the end of 2016 to the first quarter of 2020. The impact is evaluated in terms of both the quantification of the Level 1 component of high-quality liquid assets (HQLA) and the quantification of the LCR. The functioning of the mechanism under particular situations and the opportunity to change some technical aspects of the mechanism have been also discussed in the report. The analysis shows that the impact of the unwind mechanism on the LCR is practically null; it is also not possible to affirm that it could have an effect on the stability and orderly functioning of financial markets. Overall, the empirical evidence does not support the hypothesis that the unwind mechanism has a detrimental impact on the business and risk profile of credit institutions.

    The report provides an introduction to the rationale and the functioning of the unwind mechanism, including providing some theoretical examples. The empirical analysis is based on common reporting (COREP) data covering a sample of about 120 credit institutions in each year. The sample covers both globally active institutions and other credit institutions. The report includes scenario analysis in which it is assumed that the amount of central bank reserves has been substantially cut. Furthermore, an analysis of alternative definitions of the unwind mechanism and an analysis of the functioning of the unwind mechanism in the event of reverse repo operations has been presented. 

    The report shows, via theoretical examples, that, in the absence of the unwind mechanism, it would be possible for institutions to improve the amount of HQLA (and potentially the LCR) by borrowing liquid assets through short-term repos, particularly when transactions are undertaken with the domestic central bank. The case of reverse repo operations has been studied, showing that, theoretically, in this case the unwind mechanism may produce an increase in the amount of HQLA that might not be justified from a prudential point of view. For this reason, it could be helpful to include, in the regulation, the systematic comparison between the amount of HQLA with application of the unwind mechanism and the amount of HQLA without, in order to take the lower one. However, it has been empirically shown that the materiality of these situations is limited. In the observed period, and with the available sample of credit institutions, it was not possible to detect detrimental impact on the stability of the institutions.

    In aggregate terms, it was found that the unwind mechanism has an effect on only the determination of the amount of Level 1 assets and this effect is positive, whereas the effect on the LCR is null. In addition, at the bank level, few cases could be detected in which the unwind mechanism caused a relevant reduction in the LCR; in all these cases, the LCR would also have been lower than the minimum without the unwind mechanism. The report highlights that, at the end of 2020, through the Euclid project, EBA is going to receive data on regular basis, not only from a subset of banks but from all the EU banks. It is recommended that the analysis be extended over the next years to gain more experience and to be able to include in the sample smaller banks after the Euclid project has entered into force.

     

    Related Links

    Keywords: Europe, EU, Banking, LCR, HQLA, Unwind Mechanism, COREP, Liquidity Risk, Basel, EBA

    Featured Experts
    Related Articles
    News

    HKMA Finalizes Policy Modules on Group-Wide Approach and Remuneration

    The Hong Kong Monetary Authority (HKMA) revised the Supervisory Policy Manual module CG-5 that sets out guidelines on a sound remuneration system for authorized institutions.

    July 29, 2021 WebPage Regulatory News
    News

    EBA Guide to Monitor Threshold for Intermediate Parent Undertakings

    The European Banking Authority (EBA) published the final guidelines on the monitoring of the threshold and other procedural aspects on the establishment of intermediate parent undertakings in European Union (EU), as laid down in the Capital Requirements Directive (CRD).

    July 28, 2021 WebPage Regulatory News
    News

    PRA Finalizes Approach to Supervision of International Banks

    In a recent Market Notice, the Bank of England (BoE) confirmed that green gilts will have equivalent eligibility to existing gilts in its market operations.

    July 26, 2021 WebPage Regulatory News
    News

    FCA Issues PS21/9 on Implementation of Investment Firms Regime

    The Financial Conduct Authority (FCA) published the policy statement PS21/9 on implementation of the Investment Firms Prudential Regime.

    July 26, 2021 WebPage Regulatory News
    News

    EBA Proposes Regulatory Standards to Identify Shadow Banking Entities

    The European Banking Authority (EBA) proposed regulatory technical standards that set out criteria for identifying shadow banking entities for the purpose of reporting large exposures.

    July 26, 2021 WebPage Regulatory News
    News

    IOSCO Proposes Recommendations on ESG Ratings and Data Providers

    The Board of the International Organization of Securities Commissions (IOSCO) proposed a set of recommendations on the environmental, social, and governance (ESG) ratings and data providers.

    July 26, 2021 WebPage Regulatory News
    News

    ESMA Group Issues Recommendations on RFR Switch in Interdealer Market

    The European Securities and Markets Authority (ESMA) published recommendations from the Working Group on Euro Risk-Free Rates (RFR) on the switch to risk-free rates in the interdealer market.

    July 26, 2021 WebPage Regulatory News
    News

    ECB Study Assesses Impact of Basel III Finalization Package

    The European Central Bank (ECB) published a paper as well as an article in the July Macroprudential Bulletin, both of which offer insights on the assessment of the impact of Basel III finalization package on the euro area.

    July 26, 2021 WebPage Regulatory News
    News

    ISDA Finds FRTB Results in Higher Capital Charges for Carbon Trading

    The International Swaps and Derivatives Association (ISDA) published a paper that explores the impact of the Fundamental Review of the Trading Book (FRTB) on the trading of carbon certificates.

    July 26, 2021 WebPage Regulatory News
    News

    PRA Updates Remuneration Policy Statement Templates and Tables

    The Prudential Regulation Authority (PRA) published the remuneration policy self-assessment templates and tables on strengthening accountability.

    July 26, 2021 WebPage Regulatory News
    RESULTS 1 - 10 OF 7307