EBA reports on the monitoring of the LCR implementation in the EU

The European Banking Authority (EBA) published today its second Report on the monitoring of liquidity coverage ratio (LCR) implementation in the EU. This Report, which complements the one published on 12 July 2019, highlights areas in which further guidance is deemed useful for banks and supervisors in order to foster a common understanding and harmonisation of the application of the liquidity standard across the EU, as well as to reduce some level playing field issues. The EBA will continue regularly monitoring the implementation of the LCR for EU banks and will update these reports on an ongoing basis to set out its observations and provide further guidance, where necessary.

The general objective of the EBA monitoring work in the area of liquidity is to foster 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.

In particular, this second Report provides guidance on the treatment of fiduciary deposits, LCR optimisation risk, interdependent inflows and outflows and assessment of deposit guarantee schemes (DGS) conditions for a 3% outflow rates in stable retail deposits. In addition, the Report discusses a number of items in the context of a crisis, in particular in view of the COVID 19 pandemic: the usage of liquidity buffers, guidance on unwinding mechanism waivers, recourse to central bank support and additional outflows from derivatives. Finally, the Report assesses the effects of the guidance issued in the first Report.

The EBA will further assess how the guidance provided in the Report will be used by banks and supervisors and consider taking further steps, if needed (including some fully fledged products such as guidelines, recommendations, etc.), while continuing its monitoring of the aspects mentioned in the Report.

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. This put an end to any national provisions in the area of liquidity requirements laid down in the Capital Requirements Regulation (CRR).

The EBA intends to regularly monitor the implementation of the LCR for EU banks and update this report on an ongoing basis to set out its observations and additional guidance, where necessary. The EBA is currently working on a minimum harmonised methodology for the assessment of a below 3% run-off evidence in the context of Article 24(5) of the LCR Delegated Regulation. Other topics in the EBA agenda are the LCR calculated by significant currency and  diversification of liquid assets.