In principle we agree, however flexibility in setting the level of required free-floating assets would be more appropriate. The general approach of assuming a buffer of 25% of total demand might be an unfortunate simplification. As the EBA recognises, 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.
Furthermore, we disagree with the classification of Norwegian covered bonds as illiquid. As recognised by EBA the asset class has gained importance in Norway over the last years and the covered bond market (over NOK 500bn) has overtaken the government bond market in size and shows much lower volatility. Especially the supply side liquidity has improved with issuance taking place almost on a daily basis. We believe the assessment of covered bonds should be aligned with the assessment of the asset class on European level. See General Remarks.
In principle we agree, however the assessment of locked-up assets should be far more sophisticated reflecting differences in investor preferences and historic behaviour between jurisdictions (markets). See General Remarks.
In principle we agree, however setting an average fixed target for an institution’s LCR may not be wise since the target may vary over different macro cycles and/or between different institutions with different business models. Thus, an average target of 110% may be reasonable for a start but should be re-examined over time.
The estimated shortfall and thereby the suggested constraint on the use of derogations will be very dependent on the assumptions made by the EBA. The shortage for Norway and Denmark 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 then 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% in the case of Norway. This suggests that the use of derogations cannot be solely dependent on this estimate. See General Remarks.
We do not agree with point 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. The current proposal regarding the use of the derogations will involve higher costs and a competitive disadvantage.
We thus find it misleading of the EBA to state 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.