The purpose of prudential liquidity regulations is to ensure that institutions are liquid at all times. Quantitative provisions for liquidity were introduced into European law for the first time by the Capital Requirements Regulation (CRR, Regulation (EU) No 575/2013), in keeping with the Basel liquidity framework. The two Basel minimum standards (LCR, NSFR) and the additional monitoring metrics (AMM) were implemented by means of appropriate implementing technical standards and/or revised by Regulation (EU) 2019/876, which amended the CRR.
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 under a severe 30-day stress scenario. Commission Delegated Regulation (EU) 2015/61 with regard to liquidity coverage requirement for credit institutions, as amended by Commission Delegated Regulation (EU) 2018/1620, sets out the underlying stress scenario, the assets to be held under this scenario and the cash flows to be taken into account.
Net stable funding ratio (NSFR)
The NSFR is a minimum standard for reducing funding risk over a longer 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). Regulation (EU) 2019/876, which amended the CRR, established the NSFR rules published by the Basel Committee in October 2014 as a minimum requirement in the EU. One feature specific to the EU has been added to uphold the principle of proportionality: small and non-complex institutions are permitted to alternatively apply a simplified NSFR.
Additional monitoring metrics (AMM) for liquidity reporting
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 permit supervisors to appropriately analyse an institution’s liquidity and funding risk. Pursuant to Article 415(3)(b) of CRR, these additional monitoring metrics are specified in an EBA implementing technical standard.
The disclosure of liquidity ratios has been enshrined in Part Eight of the CRR by Regulation (EU) 2019/876 and set out in detail in Implementing Regulation (EU) 2021/637 (Annexes XIII and XIV). LCR disclosure comprises qualitative and quantitative information on liquidity risk management and on components and the fulfilment of the LCR and the NSFR.
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 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. In the EU, the management of intraday liquidity risk is assessed as part of SREP.