EBA reports on the LCR and NSFR implementation in the EU in the context of the new economic environment and TLTRO repayment

The European Banking Authority (EBA) published today its third Report on the monitoring of liquidity coverage ratio (LCR) and net stable funding ratio (NSFR) implementation in the EU. This Report assesses the potential impact on LCR and NSFR levels of the upcoming central bank funding repayment (mainly repayments of the targeted longer-term refinancing operations - TLTRO) as well as of a potential scenario of higher liquidity risk, particularly affecting government bonds, derivatives and repo markets, in the context of a higher interest rate environment, inflation and recession risks.

In the Report, the EBA analysed the potential liquidity and funding needs that EU banks might need to cover to maintain regulatory and prudent LCR and NSFR levels. To that end, the EBA developed some broad projections of LCR and NSFR values in 2023 and 2024 before considering alternative funding sources.  

The Report provides guidance to both banks and supervisors on how they should monitor, on an ongoing basis, the real capacity of markets and the economic conditions for potential funding sources. This is particularly important in case of reinforced funding demand by many institutions at the same time or in case of protracted periods of market volatility. The EBA also highlights the importance for banks’ funding plans to include realistic ways in which to seek other funding to replace maturing central bank funding, where needed.

Finally, the recent events and market turmoil have increased the need to collect additional / more frequent information to analyse further the liquidity situation of EU institutions. In this context, the EBA will assess further the need to amend/complement the existing regulatory reporting. In addition, in the current environment, the EBA does not intend to work further on a methodology facilitating the application of a 3% reduced outflow rate for stable retail deposits.

Legal basis, background, and next steps

The LCR is applicable in the EU since 1 October 2015, and its full implementation at a minimum of 100% became effective in January 2018. The NSFR is applicable in the EU at a minimum of 100% since 28 June 2021.

The EBA already published two monitoring reports[1] aiming at fostering a higher degree of harmonisation in the implementation of the LCR in the areas where divergent practices have been observed, partly due to insufficient clarity of the regulatory provisions and providing guidance to supervisors and institutions on certain areas like outflows applied to certain categories of deposits.

The EBA will continue monitoring some specific aspects of the LCR and NSFR due to current circumstances and interest rate environment to set out its observations and provide further guidance, where necessary.

The EBA will also assess further the need to amend/complement the existing regulatory reporting on liquidity requirements.