The European Banking Authority (EBA) published today its fourth impact assessment Report for the liquidity coverage ratio (LCR), which shows that EU banks have continued to improve their LCR since 2011. At the reporting date of 31 December 2016, EU banks' average LCR was significantly above the 100% minimum requirement, which will have to be fully implemented by 1 January 2018. In addition, a more in-depth analysis suggests that the LCR regulation, together with capital standards and stable funding, have helped banks increase their lending to real economy. The Report is based on liquidity data and wider bank balance sheet statistics from 157 EU banks across 16 Member States.
The Report shows that as of end-December 2016, EU banks' average LCR was 139% and the aggregate gross shortfall amounted to EUR 115 million. The increase in the LCR can be mainly attributed to an increase in liquid assets, which, since June 2011, have almost doubled. In contrast, net cash outflows have remained relatively stable. Central bank exposures and central government assets in banks' liquidity buffers continue to be an important component for their compliance with the LCR regulation.
This suggests that in the future, banks' short-term liquidity profiles may be affected by the changes in the macroeconomic dynamics. In addition, the Report shows that, on average, banks in various business models reach the 100% minimum requirement, despite large dispersions amongst them.
A further analysis on the banks' wider balance sheet shows that the LCR requirements support lending to real economy and a shortfall in liquidity requirements has a negative impact on banks' lending. Overall, liquidity requirements together with capital standards and stable funding increase the resilience of banks' balance sheets and reduce liquidity risk in the banking system. Funding markets reward highly liquid banks and the cost of funding decreases, thus creating further lending opportunities for these banks.
Legal basis and background
This Report has been drafted in accordance with Article 509(1) of the Capital Requirements Regulation (CRR), which mandates the EBA to monitor and evaluate the liquidity measures and their impact on the EU banking sector on an annual basis.