It is clearly important to ensure that there are enough free-floating assets for the markets to remain liquid. Thus, allowing for a buffer is essential.
However, we believe that the general approach of assuming a buffer of 25 % of total demand might be an unfortunate simplification. As the EBA recognizes, there might be a need for a larger buffer in smaller markets. On this basis it seems appropriate to consider a more dynamic buffer requirement, which at least takes market size into consideration. An alternative, more precise approach is to conduct an assessment regarding the buffer level of all the different markets when the final definitions are ready.
We agree with the general assumption that assets held by pension funds, insurance companies and central banks are regarded as 100 % locked up. Although, it seems unclear whether the EBA considers all assets owned by foreign investors to be locked-up. There are also other sources of locked-up assets such as collateral held with the central bank for intraday liquidity, collateral posted under CSA’s, CCP’s, supplementary assets in cover bond pools, etc.
In the consultation paper EBA states that “Specifically for Norway, it has been observed that roughly one fifth of the government debt is held by foreign investors that are dominated by central banks and other buy-and-hold investors, amounting to roughly NOK 105 billion of government debt locked up”. This is not in accordance with official data. As of June 2012 the amount of government debt held by foreign investors was close to 50 %. If all debt held by foreign investors is assumed to be locked-up the amount of Norwegian government debt locked up should be NOK 227 billion – not NOK 105 billion.
An average 110 % target may be a reasonable starting point in general. The individual institution’s adaption to the LCR may however vary significantly between institutions due to size and scope of operations. Large banks operating as settlement banks will for example need to take into account larger fluctuations in liquidity and might need to set the target higher. Smaller banks with more predictable liquidity fluctuations might set the target lower. The target may also vary over different macro cycles and between currencies. Since the macro liquidity in NOK varies much more than for most other currencies, Norwegian banks in general have a higher volatility in their liquidity positions than banks operating in other currencies. This implies that Norwegian banks will need to hold a higher buffer towards the liquidity coverage ratio than banks with less volatile liquidity positions. Thus, an average target of 110% may be too low for NOK, and should be re-examined over time.
If the calculated shortage shall act as the constraint on the use of derogations it is clearly important that this is estimated correctly. The need for transparency on input data, method and assumptions are crucial. We do not find these areas sufficiently presented in the draft ITS.
The estimated shortfall and thereby the suggested constraint on the use of derogations will be heavily dependent on the assumptions made by the EBA. The shortage of 63% for Norway could easily be calculated both higher and lower, with slightly different assumptions. Our conclusion is that the methodology gives results which are far less robust than what is needed for such an important part of public regulation. The sensitivity analysis clearly supports this view by showing that the shortfall varies from 47 % to 83 %. This suggests that the use of derogations cannot be solely dependent on the estimated shortfall. It is also clear that the use of derogations will have to vary between banks. Smaller banks will not use a derogation to invest in liquid assets in foreign currencies which might imply that the available pool of liquid assets for larger banks will be less than the average number calculated.
The outstanding amount of government debt in Norway has also been temporarily high in the period 2009 – 2014 due to the swap arrangement established by the Norwegian Government. Available government debt will thus be reduced when the arrangement expires increasing the shortage.
Including Norwegian equities as available liquid assets in Norway overestimates the available liquid assets for banks in Norway. Norwegian banks have no tradition of holding equities on their balance sheet.
We do not agree with pt. 9 in the Draft cost-benefit analysis/impact assessment, where the EBA states that:
“The EBA has currently identified only two EU currencies for which the availability of liquid assets is less than their justified demand. The number of institutions operating in these currencies is also small and the amount of total assets that they hold represents only a small share of the total assets held by the banking sector in the EEA. The risk of creating an uneven playing field for the application of the liquidity coverage requirement is therefore small”.
From our point of view, the lack of available liquid assets must be considered as a disadvantage for those having to fulfill the LCR, and not an advantage or a result of less professional liquidity management. We thus find it misleading of the EBA to claim that the risk of creating an uneven playing field is small based on the fact that the number of institutions and total assets in Norway and Denmark is small relative to the number of institutions and total assets held by the banking sector in the EEA.
Taking into account the proposed requirements needed to be undertaken by an institution in advance of using the derogations, haircuts on foreign currency fulfillment, increased foreign exchange risk, fees paid for credit lines, the need for derogations will pose a severe disadvantage for these institutions.