20 December 2013
The European Banking Authority (EBA) published today two Reports on liquidity, namely (i) on the impact assessment for liquidity coverage requirements and (ii) on appropriate uniform definitions of extremely high quality liquid assets (extremely HQLA) and high quality liquid assets (HQLA) and on operational requirements for liquid assets. These two reports provide the European Commission with specific recommendations for the purpose of its forthcoming delegated act.
This Report combines an empirical analysis of liquidity data provided by 357 European banks on a voluntary basis, covering about 2/3 of total banking assets in the EU, case studies as well as a literature review on this topic.
Overall, the analysis carried out by the EBA shows that a specification of the general liquidity requirement is not likely to have a material detrimental impact on the stability and orderly functioning of financial markets or on the economy and the stability of the supply of bank lending. To a large extent, this can be explained by the fact that EU banks already show an average Liquidity Coverage Ratio (LCR) of 115 per cent.
However, the potential impact differs depending on the business model. Diversified business models tend to be more adapted to the LCR than specialized banks. The EBA is, therefore, proposing specific derogations for certain business models under stringent and objective conditions.
The EBA concludes that the calibration of the liquidity coverage requirement as defined by the Basel Committee on Banking Supervision (BCBS) and endorsed by Governors and Heads of Supervisors (GHOS) is generally appropriate also across the European Union.
Finally, the EBA highlights that the work underway at the international level to recognise committed liquidity facilities (CLF) at central banks should be taken into due consideration.
The EBA has developed an empirical analysis aimed at identifying the liquidity features of financial instruments at asset class level on the basis of a range of liquidity metrics (basically price and volume metrics) and variables captureing credit quality.
The final EBA recommendations for the definitions of liquid assets combine the results of this empirical analysis with qualitative supervisory judgment and reflect the great importance the EBA attaches to the alignment with the international standards defined by the BCBS.
In particular, the EBA recommends that all bonds issued or guaranteed by EEA Sovereigns, EEA Central Banks and Supranational Institutions qualify as extremely HQLA. In addition, the EBA recommends that some specific categories of covered bonds, Residential mortgage backed securities (RMBS), corporate bonds, equities and bonds issued by local government institutions be considered as HQLA.
Although the empirical analysis shows some differences in the liquidity features of sovereign bonds, a differentiation in the supervisory treatment would reinforce the fragmentation of the single market and the sovereigns-banks loop.
Also, despite the excellent liquidity features showed by some covered bonds, doubts remain as to whether these findings are sufficient to justify a deviation from the international standards and their inclusion in the category of extremely HQLA - in fact two thirds of the observations come from markets that did not experience a real estate crisis -
The two Reports have been developed on the basis of Regulation 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms (CRR).
The delegated act the European Commission is empowered to adopt, as per Article 460 of the CRR, to specify in detail the liquidity coverage requirement, shall be based, amongst others, on these Reports.
To this aim, the EBA has been mandated, to report to the European Commission (i) as per Article 509 (1) of the CRR on the impact of the liquidity coverage requirement on the business and risk profile of institutions established in the Union, on the stability of financial markets, on the economy and on the stability of the supply of bank lending; (ii) as per Article 509 (3) and 509 (5) of the CRR on appropriate uniform definitions of high and of extremely high liquidity and credit quality of transferable assets as well as on appropriate haircuts and on the operational requirements for the holdings of liquid assets for the purposes of liquidity reporting.
As per Article 460 the European Commission shall adopt the delegated act referred to by 30 June 2014