Guidelines on liquidity cost benefit allocation

27 October 2010

The Committee of European Banking Supervisors (CEBS) has published today its guidelines on liquidity cost benefit allocation. The draft guidelines were presented for public consultation with the consultation period ending 10 June 2010. During this period a public hearing was also held. A summary of the industry's responses to the consultation paper (CP36) is published in the feedback document. Based on the analyses provided in this document, the guidelines have not substantially changed. In particular, the five main guidelines have been kept unchanged.

Following the publication of its advice to the European Commission on Liquidity Risk Managementin September 2008 and the amendments to the Capital Requirements Directive issued in September 2009 (see the new Annex V) that call for "robust strategies, policies, processes and systems for the identification, measurement, management and monitoring of liquidity risk…" that "…shall also include adequate allocation mechanisms of liquidity cost, benefits and risks", CEBS has committed to undertake further work on liquidity cost allocation.

The main objective of CEBS's guidelines is to provide high-level guidance to the institutions on the main elements to be considered when creating or reviewing adequate fund allocation mechanisms including liquidity cost, benefits and risks. Thus, a liquidity cost concept that includes not only direct funding costs, but also associated indirect costs such as liquidity contingency support, is proposed.

The guidelines focus on liquidity cost benefit allocation mechanisms as an important contribution to the institution's liquidity management framework and can, as such, help institutions to link their strategic objectives with liquidity resource allocation. Taking the proportionality principle into account, the guidelines are intended to give guidance to a wide range of institutions in terms of size and business models.

Annex 1 of these guidelines also provides examples of mechanisms currently observed in certain institutions.

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