EBA published the second report on monitoring of the implementation of the liquidity coverage ratio (LCR) in EU. The report presents observations and main conclusions reached in the area of the use of certain liquidity mechanisms amid pandemic. It also presents the new implementation issues observed since the last assessment report and summarizes the effects of EBA guidance provided in the first report, which was published in July 2019. EBA plans to continue to monitor LCR implementation and extend monitoring to the net stable funding ratio or NSFR.
The report discusses:
- Liquidity issues during a crisis period, in the COVID-19 context. The report focuses on the use of liquidity buffers, guidance on unwinding mechanism waivers, recourse to central bank support, and additional outflows from derivatives. The report provides a policy discussion on the management of liquidity buffers under stress and builds on the regulatory expectation that the liquidity buffer in the LCR is designed to be used to meet net outflows under stress. This is to avoid contagion risk and ensure liquidity injection into the economy and financial system. The report argues that the use of liquidity buffers should not be penalized by the reaction of external or internal agents. These discussions build on the observations raised by some supervisors on the reluctance of banks to use their buffers during the COVID-19 episodes.
- New implementation issues. The report identifies certain issues for which guidance is provided to ensure a common understanding. The observed issues are with respect to the treatment of fiduciary deposits, LCR optimization risks, concentration of outflows beyond 30 days, Article 26 LCR DR on outflows with interdependent inflows, and Deposit Guarantee Scheme conditions for a 3% outflow rate in retail deposits. Based on both policy and legal views, the report provides guidance to banks and supervisors on how the conditions required for the mentioned treatment should be read and shows how competent authorities might still grant, within the Pillar 1 requirement, the application of this inflow cap waiver in a partial manner if they wish to ensure a minimum LCR buffer is held.
- Impact of previous guidance. EBA has noticed that its previous guidance has positively influenced the behaviors of banks, which shows the usefulness of this guidance. The report reviews the application of the guidance to identify excess operational deposits included in the first report and identifies that some competent authorities have used different ways of communication of the guidance. Some supervisors have also confirmed that they have observed that banks treat excess operational deposits in accordance with the EBA guidance. Competent authorities confirmed the EBA guidance to identify retail deposits excluded from outflows was being applied in practice.
In this report, EBA highlights that it will continue working on monitoring the implementation of the LCR in EU and will subsequently extend it to NSFR. Some topics are already work in progress. For instance, EBA has started to work on a common understanding for a methodology to assess the required below 3% run-off evidence for the application of a 3% outflow rate in stable retail deposits (Article 24(5) of the LCR DR). EBA will work on the notifications to be received in application of Article 26(2) of the LCR DR on outflows with interdependent inflows in the context of the guidance included. EBA will also monitor the application of the guidance on unwinding waivers. Other important topics are LCR by currencies subject to separate reporting (significant currencies) and HQLA diversification in LCR, as already announced in the first report.
Keywords: Europe, EU, Banking, LCR, COVID-19, Deposit Guarantee Scheme, Basel, NSFR, EBA
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