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

    PRA to Elaborate on Approach to Transposition of CRD5 by Mid-December

    PRA published a statement that explains when to expect further information on the PRA approach to transposing the Capital Requirements Directive (CRD5), including its approach to revisions to the definition of capital for Pillar 2A.

    November 30, 2020 WebPage Regulatory News
    News

    SRB Sets Out Work Program for 2021-2023

    SRB published the work program for 2021-2023, setting out a roadmap to further operationalize the Single Resolution Fund and to achieve robust resolvability of banks under its remit over the next three years.

    November 30, 2020 WebPage Regulatory News
    News

    EIOPA Consults on KPIs on Sustainability for Non-Financial Reporting

    EIOPA is consulting on the relevant ratios to be mandatorily disclosed by insurers and reinsurers falling within the scope of the Non-Financial Reporting Directive as well as on the methodologies to build these ratios.

    November 30, 2020 WebPage Regulatory News
    News

    US Agencies Issue Statement on LIBOR Transition

    US Agencies (FDIC, FED, and OCC) issued a joint statement encouraging banks to cease entering into new contracts that use USD LIBOR as a reference rate as soon as practicable and in any event by December 31, 2021, to facilitate an orderly LIBOR transition.

    November 30, 2020 WebPage Regulatory News
    News

    GHOS Endorses Coordinated Approach to Mitigate COVID Risks for Banks

    The Group of Central Bank Governors and Heads of Supervision (GHOS), the oversight body of BCBS, endorsed a coordinated approach to mitigate COVID-19 risks to the global banking system.

    November 30, 2020 WebPage Regulatory News
    News

    HM Treasury Extends Consultation Dates for FRF and Solvency II Reviews

    HM Treasury extended the consultation period on Phase II of the Future Regulatory Framework (FRF) Review, from January 19, 2021 to February 19, 2021.

    November 30, 2020 WebPage Regulatory News
    News

    ECB Publishes Guide on Management of Climate and Environmental Risks

    ECB finalized guidance on the way it expects banks to prudently manage and transparently disclose climate and other environmental risks under the current prudential rules.

    November 27, 2020 WebPage Regulatory News
    News

    BCBS Amends Capital Treatment of Non-Performing Loan Securitizations

    BCBS published a technical amendment to the capital treatment of securitizations of non-performing loans by banks.

    November 26, 2020 WebPage Regulatory News
    News

    PRA Policy on Stressed VaR and RNIV Calculations Under Market Risk

    PRA published the policy statement PS23/20 on the calculation of stressed value at risk (sVAR) and risks not in value at risk (RNIV) under the market risk framework.

    November 26, 2020 WebPage Regulatory News
    News

    BoE to Move Statistical Data Collection to BEEDs Portal

    BoE announced that the Data and Statistics Division is planning to move collection of statistical data to the BoE Electronic Data Submission (BEEDS) portal.

    November 25, 2020 WebPage Regulatory News
    RESULTS 1 - 10 OF 6179