The Association of Danish Mortgage Banks (Realkreditrådet), The Danish Bankers Associ-ation (Finansrådet) and the Danish Mortgage Banks' Federation (Realkreditforeningen)
We find that the scope of these requirements is unclear. At the public hearing on this CP on 19 November 2013, the EBA stated that the use of derogations would not require specific approval. Instead, national authorities would be able to impose additional requirements under Pillar II if an institution had not made a sufficient effort to reduce the need for deroga-tions. Furthermore, it was our impression that the EBA did not expect that national authori-ties should initially intervene in institutions' business models, but at least understand the basis of their liquidity needs.
The proposal seems to unduly introduce stricter prudential requirements on liquidity man-agement in the currency areas in question, simply because there is a shortage of LCR-compliant liquid assets.
Instead, national authorities should react if they deem the cash management under a given business model in an institution to be unsatisfactory, regardless of whether or not there is shortage of assets.
It does not make sense to impose a penalty on the use of collateral that is not classified as liquid assets. Money market rates reflect the marginal lending or deposit rates set by central banks. Imposing higher rates on some types of collateral would distort monetary policy. The existence of multiple rates depending on the liquidity position of the banking system would create problems, in particular in exchange rate targeting regimes, where the monetary policy rates often have to be set within narrow intervals.
We do not find the proposal to limit the total use of derogations appropriate. Rather than setting constraints at the micro level, the use of derogations should be supervised by the appropriate national authorities with the possibility of taking additional steps towards the institutions using derogations if the total use of derogations exceeds the total estimated shortage of liquid assets.
Capping the use of derogations based on a macro perspective may also have unintended consequences on the market for liquid assets. A macro level shortage of liquidity reflects a range of individual institution (micro) level shortages. Institutions with little or no shortage will have a cost incentive to retain their holdings of liquid assets, as they are capped and therefore scarce. This will further reduce the availability of liquid assets, i.e. increase the amount of locked-up liquid assets, thus increasing costs for institutions with a greater-than-average shortage.
The proposal to limit the use of derogations by imposing both a price and a supply regula-tion is worrying. A supply limitation would, by itself affect the price of liquid assets. But it might also lead to sudden cliff effects for institutions - particularly if the frequency of recal-culation of the estimated shortage of liquid assets is irregular.