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Liquidity

Regulation on the liquidity of institutions (Liquidity Regulation)

The Regulation on the liquidity of institutions (Liquidity Regulation; Liquiditätsverordnung) of 14 December 2006 was published in the Federal Law Gazette (Bundesgesetzblatt, 2006, part I, no 61, p 3117 ff) on 20 December 2006 and came into force on 1 January 2007. It supersedes Principle II on the liquidity of institutions. The Liquidity Regulation gives concrete shape to the requirements of section 11 (1) sentence 1 of the German Banking Act (Kreditwesengesetz), which requires institutions to have sufficient liquidity at all times. The Regulation must be applied by all credit institutions and certain financial services institutions. The Liquidity Regulation is to be applied exclusively to single entities; it is not applicable on a consolidated basis.

The Liquidity Regulation will modernise the quantitative liquidity rules by creating a more risk-oriented and principles-based supervisory regime. Since the beginning of this year, section 10 of the Liquidity Regulation has, for the first time, given institutions the option of using – subject to prior approval by supervisors – their own risk measurement and management systems for prudential purposes to mitigate liquidity risk. Such an individualised procedure must fulfil stringent requirements, compliance with which is assessed by supervisors in an approval examination. A liquidity risk measurement and management system within a group of institutions or financial holding group can also be deemed to comply with the requirements for utilisation. The waiver rule allowing affiliated institutions to be exempted from single-entity solvency supervision pursuant to section 2a of the Banking Act has thereby also been carried over on to liquidity supervision.

For institutions that do not use their own procedures, the Liquidity Regulation represents virtually no change from current practice, since the Principle II rules have been incorporated into the regulation largely unchanged as the "standardised approach".

The standardised approach concept implemented through the Liquidity Regulation is based on the assumption that three main factors determine the adequacy of an institution's liquidity provisioning.

  • The extent of the expected inflows and outflows of funds.
  • Sufficient liquidity provisioning in the form of highly liquid assets.
  • The refinancing lines in the money market.

The standardised approach is a combination of a maturity mismatch approach and a stock approach. Under the maturity mismatch approach, the expected inflows of funds from certain balance sheet and off-balance sheet asset items as well as outflows from certain balance sheet and off-balance sheet liability items are recorded in four maturity bands depending on their residual maturities or assumed call probabilities, and the relevant over- or undercoverage is calculated.

  • Due on demand up to one month
  • Over 1 month and up to 3 months
  • Over 3 months and up to 6 months
  • Over 6 months and up to 12 months

Under the stock approach, listed securities and covered debt securities as well as fixed assets eligible for refinancing with a central bank are recognised as highly liquid assets (first maturity band, irrespective of the underlying residual maturities). These positions are regarded as having the potential to offset payment obligations at any time. The combination of the two approaches ensures that an institution's liquidity risk is adequately captured.

An institution's liquidity is sufficient, on balance, if the funds – calculated from the respective reporting date – available for the next month (maturity band 1) at least cover the expected payment outflows during that period. This is assessed by means of a liquidity ratio that has to be reported monthly; this ratio, which is calculated as the quotient of the available funds and the callable payment obligations in the first maturity band, must be at least equal to one.

Ermittlung der Liquiditätskennzahl [+]






In addition, observation ratios have to be calculated; they provide information about the likely liquidity flows in the second, third and fourth maturity band. Any surplus funds (positive mismatch) left over from the preceding maturity band are to be recognised as additional funds. There are no minimum levels for the observation ratios.

The Liquidity Regulation requires that institutions generally submit monthly returns to the Deutsche Bundesbank by the 15th business day after the end-of-month reporting date (Forms LV 1 and LV 2). In the case of institutions that use their own internal procedures, the reporting requirements are imposed by BaFin on a case-by-case basis. Such reports are to be submitted electronically only.