October 30, 2018

EC, published in the Official Journal of the European Union, the Delegated Regulation (EU) 2018/1620 on liquidity coverage requirement for credit institutions. This regulation amends Delegated Regulation (EU) 2015/61 to supplement the Capital Requirements Regulation (No 575/2013). The changes are intended to improve alignment with international standards and facilitate more efficient liquidity management by credit institutions. The regulation shall enter into force on the twentieth day following that of its publication in the Official Journal of the European Union. It shall apply from April 30, 2020.

The regulation stipulates that, to take adequate account of activities carried out by credit institutions active outside EU, any requirement for a minimum issue size applying to liquid assets held by a subsidiary undertaking in a third country should be waived, so that such assets can be recognized for consolidation purposes. Otherwise, the parent institution could suffer a shortfall in liquid assets at consolidated level since the liquidity requirement arising from a subsidiary in a third country would be included in the consolidated liquidity requirement while the assets held by that subsidiary to fulfill its liquidity requirement in the third country would be excluded from the consolidated liquidity requirement. However, the assets of the subsidiary undertaking in a third country should only be recognized up to the level of the stressed net liquidity outflows incurred in the same currency as the currency in which the assets are denominated and arising from that particular subsidiary. Moreover, as for any other third-country assets, the assets should only be recognized if they qualify as liquid assets under the national law of the third country in question.

In addition, the treatment of outflow and inflow rates for repurchase agreements (repos), reverse repurchase agreements (reverse repos), and collateral swaps should be fully aligned with the approach in the international standard for the liquidity coverage ratio set by BCBS. Specifically, the cash outflows calculation should be directly linked to the prolongation rate of the transaction (aligned with the haircut on the collateral provided applied to the cash liability, as in the BCBS standard) rather than to the liquidity value of the underlying collateral.

 

Related Link: Regulation (EU) 2018/1620

Effective Date: November 19, 2018

Keywords: Europe, EU, Banking, LCR, Liquidity Risk, CRR, Regulation 2018/1620, EC

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