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December 18, 2017

EBA published the fourth impact assessment report for the liquidity coverage ratio (LCR). The report shows that banks in the EU have continued to improve their LCR since 2011 and comply with the LCR requirement of 100%, ahead of its full implementation date of January 01, 2018.

The report shows that the average LCR of EU banks was 139% and the aggregate gross shortfall amounted to EUR 115 million. The increase in the LCR can be mainly attributed to an increase in liquid assets, which, since June 2011, have almost doubled. In contrast, net cash outflows have remained relatively stable. Central bank exposures and central government assets in banks' liquidity buffers continue to be an important component for their compliance with the LCR regulation. This suggests that in the future, banks' short-term liquidity profiles may be affected by the changes in the macroeconomic dynamics. In addition, the report shows that, on average, banks with various business models reach the 100% minimum requirement, despite large dispersions among them

A more in-depth analysis suggests that the LCR regulation, along with the capital standards and stable funding, have helped banks increase their lending to real economy. The report is based on liquidity data and wider bank balance sheet statistics from 157 EU banks across 16 member states. A further analysis on the banks' wider balance sheet shows that the LCR requirements support lending to real economy and a shortfall in liquidity requirements has a negative impact on bank lending. Overall, liquidity requirements, along with the capital standards and stable funding, increase the resilience of banks' balance sheets and reduce liquidity risk in the banking system. Funding markets reward highly liquid banks and the cost of funding decreases, thus creating further lending opportunities for these banks.

 

Related Link: Press Release and Report

Keywords: Europe, EU, Banking, Basel III, LCR, Impact Assessment, EBA

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