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Liquidity

Liquidity regulation

The purpose of prudential liquidity regulations is to ensure that institutions are liquid at all times. The Capital Requirements Regulation (CRR, Regulation (EU) No 575/2013) transposes the Basel liquidity framework into European law and for the first time introduces two minimum standards as well as additional liquidity monitoring metrics applicable throughout Europe.

Liquidity coverage ratio (LCR)

The LCR defines the minimum stock of high-quality liquid assets (HQLA) credit institutions need to hold as liquidity reserves in order to cover their net cash outflows in a 30-day stress scenario. The amount and type of the assets they are expected to hold, and of the liquidity flows they should take into account, are defined in the stress scenario presented in the underlying Delegated Regulation (Commission Delegated Regulation (EU) 2015/61).

Net stable funding ratio (NSFR)

The NSFR is a minimum standard designed to reduce funding risk over a longer time horizon. It aims to ensure that institutions have a sustainable funding structure by limiting maturity transformation between asset-side business and funding, thereby mitigating the risk of future funding problems. To this end, the sum of liabilities weighted by their degree of long-term reliability (available stable funding) must at least be equal to the sum of assets and off-balance-sheet exposures weighted by factors that reflect their liquidity characteristics and residual maturities over a medium-term horizon (required stable funding). The CRR II transposes the NSFR rules published by the Basel Committee in October 2014 into EU law and now establishes the NSFR as a minimum standard. One feature specific to the EU has been added to uphold the principle of proportionality: in future, small and non-complex institutions will be given the option of applying a simplified NSFR.  

Additional monitoring metrics (AMM)

Credit institutions’ liquidity status is too complex to be suitably captured by just two metrics. Therefore, the two minimum standards have been augmented by monitoring metrics which enable supervisors to appropriately analyse an institution’s liquidity and funding risk.

Disclosure

The EBA guidelines on LCR disclosure were published on 8 March 2017 and have been applicable since 31 December 2017. They supplement the existing European disclosure requirements and complete the disclosure format harmonised across Europe. LCR disclosure comprises qualitative and quantitative information on liquidity risk management and on components and fulfilment of the LCR. The NSFR’s implementation as a minimum standard was flanked by the introduction of disclosure rules for the NSFR.

Intraday liquidity

Credit institutions need to have intraday liquidity at all times in order for payment and settlement systems to function smoothly. That is why intraday liquidity management is a key principle of sound liquidity risk management. The “Monitoring tools for intraday liquidity management” proposed by the Basel Committee comprise specific metrics for monitoring intraday liquidity for the purposes of institutions’ internal liquidity management as well as banking supervision and payments oversight.

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