Topic:

Liquidity
Summary

In view of an ongoing and comprehensive review of the Basel III framework, initiated by the BCBS, the European Parliament adopted a Resolution on the finalisation of Basel III on 23 November 2016 putting forward a Proposal for a Regulation amending the CRR as regards the leverage ratio, the net stable funding ratio, requirements for own funds and eligible liabilities, counterparty credit risk, market risk, exposures to central counterparties, exposures to collective investment undertakings, large exposures, reporting and disclosure requirements and amending Regulation (EU) No 648/2012 (CRRII).

Key elements of the Commission’s proposals include:

• a binding 3% leverage ratio (LR) (in addition to risk based capital requirements);
• a binding detailed net stable funding ratio (NSFR), calculated as the ratio of an institution’s available stable funding needs over a one-year horizon;
• a requirement to have more risk-sensitive own funds for institutions that trade in securities and derivatives, following the BCBS’ work on the fundamental review of the trading book;
• waivers from capital and liquidity requirements under certain conditions, where a competent authority supervises parents and subsidiaries established in different members states
• implementation of the TLAC standard for G-SIIs

A new Title is added to Part Six of CRR, and adjustments to existing provisions have been made to introduce the binding net stable funding ratio (NSFR) for credit institutions and systemic investment firms. It is expected that the proposed amendments will start entering into force in 2019 at the earliest.

Latest

On 19 June 2018, ECON announced it backed the draft reports on the proposals to amend CRDIV and CRR. MEPs agreed to a binding 3% leverage ratio and an additional 50% buffer for global systemically important institutions (GSIIs). They also refined Net Stable Funding Ratio (NSFR), rules for ascertaining whether an institution holds sufficient stable funding to meet its funding needs during a one-year period under both normal and stressed conditions. They also stipulating that the amount of own funds waived should not exceed 25% of the minimum own funds requirement.

On 13 July 2018, the European Commission adopted a Delegated Regulation amending Delegated Regulation (EU) 2015/61 (the LCR Delegated Regulation).  The Regulation makes certain limited amendments to the LCR Delegated Regulation in order to improve its practical application. The principle amendment fully aligns the calculation of expected liquidity outflows and inflows on repurchase agreements, reverse repurchase agreements and collateral swaps transactions with the international liquidity standard developed by the Basel Committee on Banking Supervision. It also deals with the treatment of certain reserves held with third-country banks, the waiver of the minimum issue size for certain non-EU liquid assets, the application of the unwind mechanism for the calculation of the liquidity buffer and the integration of the new criteria for simple, transparent and standardised securitisations.

The Delegated Regulation is now subject to scrutiny by the European Parliament and the Council.

Background

In December 2010 the Basel Committee on Banking Supervision (BCBS) introduced two new liquidity ratios for banks in a move away from short-term wholesale funding towards a longer-term funding strategy. These 2 ratios are key components of the Basel III reforms to strengthen global capital and liquidity regulation.

The Liquidity Coverage Ratio (LCR) is designed to strengthen the ability of banks to withstand adverse shocks and promotes the short-term resilience of a bank's liquidity risk profile by ensuring that a bank has an adequate stock of unencumbered high-quality liquid assets (cash, government bonds and other liquid securities) to meet its liquidity needs for a 30 calendar day liquidity stress scenario.

The Net Stable Funding Ratio (NSFR) is a longer term liquidity buffer designed to act as a minimum enforcement mechanism to complement the LCR standard and reinforce other supervisory efforts. The NSFR aims to limit over-reliance on wholesale funding during times of buoyant market liquidity and encourage better assessment of liquidity risk across all on and off-balance sheet items. It is intended to ensure that banks hold longer-term, stable sources of funding relative to the liquidity profiles of assets funded. Under the NSFR standard, deposits assumed to run off during a one-year stress scenario do not provide stable funding and will have to be held in liquidity rather than deployed to longer-term assets requiring stable funding.

On 7 January 2013 BCBS issued a finalised standard on the LCR with a note summarising the changes from the 2010 version. The LCR is subject to phase-in arrangements which align with those applicable to the Basel III capital adequacy requirements. (see details)

The Group of Governors and Heads of Supervision (GHOS) asked the Committee to undertake some additional work on liquidity disclosure, the use of market-based indicators of liquidity within the regulatory framework, and the interaction between the LCR and the provision of central bank facilities. This was completed in January 2014 (see below).

The CRD IV legislative package which implements the Basel III requirements, was approved in April and came into force on 28 June 2013 (CRR) and 17 July 2013 (CRD IV) respectively. The legislation, consisting of the Capital Requirements Regulation (CRR) and the Directive (CRD IV) has applied for the most part from 1 January 2014 subject to certain delayed implementation periods, transitional provisions and national discretions within the package. It is of note that the CRD IV is less prescriptive than Basel III.

The CRR introduces the two new liquidity buffers - LCR and NSFR. As an EU Regulation, it is binding without the need for changes to domestic law. The Commission is mandated under Article 260 to  specify in detail the general liquidity coverage requirement for credit institutions. Commission Delegated Regulation (EU) 2015/61 of 10 October 2014 (LCR Delegated Regulation) entered into force on 1 October 2015. The LCR Delegated Regulation specifies which assets are to be considered as liquid (HQLA) and how credit institutions must calculate the expected cash outflows and inflows over a 30 calendar day stressed period.