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Liquidity

Liquidity regulation

01.01.2018

The purpose of prudential liquidity regulation is to ensure that institutions are liquid at all times. In implementing the Basel III framework, two minimum standards as well as additional parameters for liquidity monitoring have been introduced for the first time across Europe.

Liquidity coverage ratio (LCR)

The LCR defines the minimum stock of high-quality liquid assets (HQLA) credit institu-tions need to hold as liquidity reserves in order to cover their own net cash outflows under a 30-day stress scenario. The amount and type of assets to be held, as well as the liquidity flows to be taken into account, are defined in the underlying Commission Delegated Regulation (EU) No 2015/61.

Net stable funding ratio (NSFR)

The NSFR is a minimum standard for reducing funding risk over a relatively long time horizon. The purpose of the NSFR is 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, total liabilities, weighted by long-term availability (available stable funding) must be equal to or above total assets weighted by their liquidity characteristics plus medium-term funding needs from off-balance-sheet exposures (required stable funding). The CRR is being reviewed at the European level, with one element currently being the development of a legal basis for the introduction of a structural liquidity ratio.

Additional monitoring metrics (AMM)

Credit institutions’ liquidity status is too complex to be portrayed using only 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 are applicable from 31 December 2017. They augment 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.

Intraday liquidity

Credit institutions need to have intraday liquidity at all times in order for payment and settlement systems to function smoothly. Intraday liquidity management is therefore a fundamental component of 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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