Featured Product

    ECB Issues Results of Sensitivity Analysis of Liquidity Risk for Banks

    October 07, 2019

    ECB published results of 2019 stress test on sensitivity analysis of liquidity risk. This test was conducted to assess the ability of banks to withstand hypothetical idiosyncratic liquidity shocks. The results of the 2019 supervisory stress test highlight that a vast majority of banks, which are under the direct supervision of ECB, have overall comfortable liquidity positions, despite certain vulnerabilities that require further attention.

    The results of the exercise are broadly positive, with nearly half of the 103 banks that took part in the exercise reporting a “survival period” of more than six months under an adverse shock and more than four months under an extreme shock. The survival period is defined as the number of days a bank can continue to operate using available cash and collateral without access to the funding markets. The six-month time horizon exceeds the period covered by the liquidity coverage ratio, which requires banks to hold a sufficient reserve of high-quality liquid assets to allow them to survive a period of significant liquidity stress lasting 30 calendar days. Long survival periods under the severe shocks envisaged by the exercise would leave banks with a significant time to deploy their contingency funding plans.

    Universal banks and global systemically important banks would generally be affected more severely than others by the idiosyncratic liquidity shocks. This is because these banks typically rely on less stable funding sources such as wholesale and corporate deposits, which were subject to higher outflow rates in the exercise. Retail banks would be affected less strongly, given their more stable deposit base. Based on the findings of the exercise, ECB will require banks to follow up mainly in the following areas where vulnerabilities were identified:

    • Survival periods calculated on the basis of cash flows in foreign currencies are often shorter than those reported at the consolidated level. Several banks make recourse to short-term wholesale funding denominated in such currencies and some of them may be overly reliant on the continued functioning of the foreign-exchange swap market.
    • When considered on a stand-alone basis, subsidiaries of euro area banks domiciled outside the euro area typically display shorter survival periods than those within. While it is common for subsidiaries to rely on intragroup funding and/or funding from the parent, this may expose some banks to ring-fencing risk in foreign jurisdictions.
    • Certain regulatory “optimization strategies” revealed in the exercise will be discussed with the banks in the context of the supervisory dialog.
    • Many banks would be able to mobilize collateral in addition to readily available liquidity buffers to secure extra funding in times of need. However, collateral management practices, which are critical in the event of a liquidity crisis, would benefit from further improvement in some banks.
    • Banks may underestimate the negative impact on liquidity that could result from a credit rating downgrade. Banks with recent experience of managing liquidity under stressed conditions were able to provide higher-quality data in this context.

    The test helped uncover data quality issues related to the liquidity reporting of a number of banks. The findings will help to improve the quality of supervisory information in the future. Supervisors will discuss the conclusions individually with the banks as part of the annual supervisory review and evaluation process (SREP). The results will not directly affect supervisory capital requirements. They will, however, inform the assessment of the governance and liquidity risk management of banks.

     

    Related Links

    Keywords: Europe, EU, Banking, Stress Testing, Liquidity Risk, Sensitivity Analysis, SREP, SSM, LCR, ECB

    Featured Experts
    Related Articles
    News

    BoE Seeks Information Before Migrating Statistical Reporting to BEEDS

    The Bank of England (BoE) published the Statistical Notice 2021/09 requiring additional information from firms and software vendors to assist in the onboarding and testing phases for migrating statistical reporting to the BEEDS portal.

    October 25, 2021 WebPage Regulatory News
    News

    FCA Publishes Final Rules on Investment Firms Prudential Regime

    The Financial Conduct Authority (FCA) published the final rules on the Investment Firms Prudential Regime (IFPR) to streamline and simplify the prudential requirements for solo-regulated UK firms authorized under the Markets in Financial Instruments Directive (MiFID).

    October 25, 2021 WebPage Regulatory News
    News

    CFRF Publishes Guides to Manage Financial Risks from Climate Change

    The working groups of the Climate Financial Risk Forum (CFRF) published a second round of guides (or Session 2 guides), written by the industry for the industry, to help financial firms manage climate-related financial risks.

    October 21, 2021 WebPage Regulatory News
    News

    PRA Finalizes Policy for Non-Performing Exposure Securitizations

    The Prudential Regulation Authority (PRA) published the final Policy Statement PS24/21 that contains the new Non-Performing Exposures Securitization Part of the PRA Rulebook and an updated Supervisory Statement SS10/18 on the general requirements and capital framework with respect to securitizations.

    October 21, 2021 WebPage Regulatory News
    News

    EBA Updates Filing Rules for Supervisory Reporting

    The European Banking Authority (EBA) published version 5.1 of the filing rules for supervisory reporting.

    October 19, 2021 WebPage Regulatory News
    News

    ECB Amends Guideline on Procedures for Collection of AnaCredit Data

    The European Central Bank (ECB) Guideline 2021/1829 on the procedures for the collection of granular credit and credit risk data has been published in the Official Journal of European Union.

    October 19, 2021 WebPage Regulatory News
    News

    ECB Amends Guideline on Procedures for Collection of AnaCredit Data

    The European Central Bank (ECB) Guideline 2021/1829 on the procedures for the collection of granular credit and credit risk data has been published in the Official Journal of European Union.

    October 19, 2021 WebPage Regulatory News
    News

    EBA Publishes Standards on Disclosure of Investment Policy Under IFR

    The European Banking Authority (EBA) published the final draft regulatory technical standards on disclosure of investment policy by investment firms, under the Investment Firms Regulation (IFR).

    October 19, 2021 WebPage Regulatory News
    News

    EU to Explore Potential of Establishing a Joint Cyber Unit

    The European Council adopted conclusions inviting the European Union (EU) and the member states to further develop the cybersecurity crisis management framework.

    October 19, 2021 WebPage Regulatory News
    News

    EC Sets Out Work Program for 2022

    The European Commission (EC) adopted the work program for 2022.

    October 19, 2021 WebPage Regulatory News
    RESULTS 1 - 10 OF 7598