Setting the threshold for regulatory liquidity indicators at the level above their minimum regulatory requirement means that, banks have to launch recovery procedure while they still have very large liquidity buffer, which allow them to regulate their commitments/ payments and that would allow to withstand stress outflows defined by LCR.
Launching the recovery procedure at this level and having public disclosures around this situation may in itself have very negative impact on the reputation of an institution by increasing the uncertainty of clients and even sparking severe liquidity problems (e.g. bank-run).
Instead of focusing on rebuilding / strengthening the liquidity buffer, the bank may be forced to actually manage materialization of reputational risk. Bank also has Liquidity Contingency Procedures that should be launched first when rebuilding the buffer requires additional measures.
Usage of liquidity buffers should not be necessarily perceived by supervisors as liquidity mismanagement. The impact of setting threshold at the level above 100% means that banks in order to avoid supervisory interaction and potential reputational effects set their target levels at much higher levels building buffers on buffers to prevent triggering recovery plan even in stress situations.
The issues mentioned above have also been noticed and described by EBA in the section 2.1 Usage of the liquidity buffer in the Report: MONITORING OF LIQUIDITY COVERAGE RATIO IMPLEMENTATION IN THE EU- SECOND REPORT dated 15 March 2021 (EBA/REP/2021/07).
Taking into account the above mentioned arguments, we would like to ask EBA to reconsider the calibration process of triggering recovery plan to focus more on a point where rebuilding of liquidity buffer seems unfeasible taking into account Liquidity Contingency measures.
We fully understand presented rationale for monitoring Liquidity Position to assess available liquidity beyond HQLA and overall counterbalancing capacity. However this may be achieved by including it as part of early warning system and not part of minimum recovery indicators for which trigger levels could potentially activate recovery measures, supervisory actions and public disclosures.
Let’s consider a case, where an institution has high level of HQLA and non-HQLA assets and took actions to convert some of its non-HQLA into HQLA. As a result LCR level has been significantly increase, but Liquidity Position, defined as non-HQLA capacity, has been reduced to a point where it triggers escalation and recovery actions.
Triggering escalation processes and subsequent recovery actions may have significant impact on the reputation of an institution and may trigger liquidity stress.
Taking into account the above, we would like to ask EBA to reconsider whether it would be necessary to have this measure as a recovery indicator or whether the same objectives could be achieved by having it as part of early warning system.