The Implementation of Basel III Liquidity Standards in
The Implementation of Basel III Liquidity Standards in CRD IV The 2011 Forum on Basel III Implementation July 12, 2011, Zurich Stefan W. Schmitz Disclaimer: The opinion of the presenter does not necessarily reflect those of the Oe. NB or the Eurosystem. stefan. schmitz@oenb. at
Structure 1. Liquidity in the CRD IV – Pillar I 2. Harmonised liquidity reporting 3. QIS results 4. Liquidity in the CRD IV – Pillar II 5. Assessment 6. Impact on monetary policy implementation 7. Conclusions 2
Liquidity in the CRD IV – Pillar I
Current status 1. EU liquidity regulation – Heterogeneuous quantitative liquidity regulation – Heterogeneuous liquidity reporting (COREP) 2. High-level principles for liquidity risk management in pillar II – CRD II Annex 3. CEBS Guidelines
Basel III liquidity standards BCBS International framework for liquidity risk measurement, standards and monitoring , December 2009 1. Objectives – Harmonisation of quantitative liquidity regulation – Stability of individual institutions under stress – Systemic stability under stress 2. Liquidity stress tests – Instrumental to achieve more risk sensitive ratios – Static minimum stress scenarios 3. Standards – Liquidity Coverage Ratio (2015) – Net Stable Funding Ratio (2018) 5
Liquidity Coverage Ratio (LCR) Objective – Liquidity even under very severe liquidity stress over 30 days w/o gov & CB assistence – Level 1 Minimum requirements Definition LA (liquide Assets) • Cash, CB excess reserves • Government bonds & gov guaranteed bonds (0% risk weight ; AA-) • Bonds of other public authorities (etc) Level 2 (HC 15%) [max. 40%] + Govies, PSEs (20% risk weight) + Covered bonds & non-financial corporate bonds ( AA-) & high (HC 15%) & substantial restrictions Stress scenario 1. Combination of market- & idiosynkratic stress 2. Rating downgrade (3 notches) 3. Run-off of retail- & wholesale deposits 4. Primary & secondary markets (repo & securitisation) dry-up for many assets 5. Large cash outflows due to off-balance items 6
LCR: net-cashflow calibration Cash inflows over 30 days (cap 75%) Cash outflows over 30 days Retail deposits 10%: Less stable deposits 5%: Stable retail deposits 100%: Financials, banks w/o operational relationship Unsecured wholesale funding 75%: Non-financials, CBs & PSE, nonoperational balance Retail loans Unsecured funding 50%: Planned inflows from performing retail loans 100%: Planned inflows from performing wholesale loans (financials) 50%: Planned inflows from performing wholesale loans (non-financials) 25%: Operational balance (all legal entities) 0%: Operational balances 5, 10%: SMEs 100%: Receivable from repo w assets non - eligible assets Secured funding 100%: Repos w non-eligible assets, margin calls (3 notche DG), ABCP & SIVs, Term ABS 25%: PSE/CBs repos w non-eligible assets 15%: Repos w level 2 assets 0%: Repos w level 1 assets Credit & liquidity lines 100%: Contractual outflows 100%: Non-financial (li) & financials & governments 10%: Non-financials, PSEs, CBs (credit) 5%: Retail clients (credit & li) Secured funding 15%: Receivable from repo w level 2 assets 0%: Receivable from repo/reverse repo w level 1 assets Credit & liquidity lines 0%: Undrawn liquidity lines & other facilities (Summary) 7
Net Stable Funding Ratio (NSFR) Objective – Reduce maturity mismatch between funding and assets – ASF (Available Stable Funding) 100%: Capital, hybrids, liabilities w residual maturity > 1 y 90%: Stable deposits 80%: Less stable deposits 50%: Wholesale funding (nonfinancials) 0%: Rest Assets > 1 y funded by 2 x LCR run-offs liabilities > 1 y RSF (Required Stable Funding) 0%: Cash, CP, bonds w residual maturity < 1 y, non-renewable interbank loans 5%: Govies et al. ( AA), offbalancesheet 20%: Corporate bonds & covered bonds & govies ( AA), residual maturity 1 y 50%: Corporate bonds & covered bonds ( A-) 1 y, loans to nonfinancial corporates < 1 y 65%: Unencumbered mortgages ( 35% RW) 85%: Retail loans < 1 y 100%: Rest (Summary) 8
Challenges (I) Level of application • Solo • EU parent credit institution – consolidated • Investment firms (>730 K) Waivers • Application can be waived for members of a group/institutional network within same MS • Incentivice advances in LRM • Application shall be waived for cross-border groups/instititional networks • Joint analysis & decision of home/host supervisors EBA • Host-supervisor can effectively veto waiver • No waiver for EU subsidiaries of non-EU parents
Challenges (II) Treatment of intra-group exposure Supervision of subsidiaries & branches • Symmetric treatment: : 100% run-off • Article 41 (1), EU Directive 2006/48 EC • Intra-liquidity -sub-group : supervisory discretion as long as symmetry/more conservative approach maintained • Harmonisation of li-standards responsibility shifts to home-supervisor • Complex procedure of information exchange/on-site fact finding
Challenges (III) Monitoring tools Currencies • Full harmonisation of liquidity reporting • LCR in single currency • Coherence with Basel III monitoring tool • But composition consistent with the distribution by currency of net outflows
Challenges (IV) Liquid assets EBA technical standards • Asset classes defined • Partly postponing political decisions • Basic operational characteristics clear • Workload for EBA manageable? • Eligible collateral, listed, valuation simple, traded in deep/liquid markets • But operational characteristics still to be calibrated
Harmonised liquidity reporting
Maturity mismatch template Contractual / behavioural maturities Gross / net cash flows Liquidity coverage approach / separation of liquidity risk exposure & risk bearing capacity Single currency / multiple currencies Frequency, cut-off date and reporting time lag Product oriented/accounting balance sheet based versus functional items Consolidated / solo Differentiation according to business model / comprehensive template Stock of liquid assets / counterbalancing capacity Reporting period and bucket size (9 buckets) Proportionality 14
Challenges 1. WGL plans to develop a similar template – – Focus on LCR EBA template focuses on liquidity monitoring 2. Proportionality – – Majority of banks should report monthly Largest banks weekly Rest quarterly Similar waiver as for LCR can apply for liquidity sub-groups 15
QIS results 16
QIS results -1, 730 bn € Source: BIS (2011). -2, 890 bn €
Main drivers LCR outflows Source: BIS (2011).
Main drivers LCR inflows Source: BIS (2011).
Composition of liquid assets Source: BIS (2011), Chart 6.
Challenges 1. Potential behavioural reactions – Reduction of refinancing via unsecured interbank deposits – Terming out and staggering of funding via unsecured interbank deposits – Promoting stable deposits – Substitution of liquid for illiquid assets & within liquid assets towards lower hair-cuts – Off-balance-sheet: Reduction of undrawn liquidity/credit lines unless fairly priced – Improvement of data quality Practical challenge in terms of costs/economic impact low
Liquidity in the CRD IV – Pillar II
Pillar II – CRD II Annex V Liquidity buffers CFP LTF Qualitative liquidity regulation LST/risk mitigation Cross-border transfers Risk tolerance Cash-flow monitoring Collateral monitoring 23
Relevant CEBS Guidelines 1. CEBS’S Technical Advise on Liquidity Risk Management (2 nd part) 2. Guideline on Liquidity Buffers & Survival Periods 3. High level principles for risk management 4. Guidelines on Stress Testing CEBS 5. Guidelines on Liquidity Cost Benefit Allocation 24
Challenges 1. Coherence across directives/regulations/guidelines 2. Coherent implementation/interpretation/application across EU 3. Principles based detailed guidance 4. Supervisory authorities often prefer „box-ticking“ approach 5. Expertise & judgement rule of law/liability of authorities 25
Assessment
Assessment (I) 1. International harmonisation of standards & reporting (EU) 2. Binding quantitative liquidity standards – Internalise negative externalities n – But LCR/NSFR not binding for most banks Maintain confidence under stress 3. Risk sensitive across balance sheet structures – Across banks/time improvement wrt to simple stock approaches – But not risk sensitive with respect to market/banking environment n – More refined stock approach with static run-off rates Definition of components product specific n Liquidity risk characteristics/product innovation?
Assessment (II) 4. Stress testing stocks problematic – Insufficient picture of li-situation – Preferrable gross cash-flows & counterbalancing capacity 5. Approach to liquid assets inconsistent with stress test approach – 6. Unintended consequences n Feedback on market liquidity through frozen portfolios/fire sales? n Increasing reliance on CRAs cliff-effects feedback on markets Scope of application
Assessment (III) 7. Consistency between CRD IV and CEBS Guidelines? – 8. Distinction pillar I & pillar II Potential impact – Ratios watered down substantially after QIS – still binding? – Competition for deposits intensivies – deposit growth/long-term debt issuance constrain loan growth § – Challenges for emerging, fast growing economies Interbank market – liquidity insurance, structural li-deficit & monetary policy implementation 29
Impact on monetary policy implementation
Impact on monetary policy (I) Arbitrage via CB Unsecured interbank market Impact of crisis LCR Structural liquidity deficit Main target rate
Impact on monetary policy (II) 32
Impact on monetary policy (III) 33
Challenges for monetary policy 34
Conclusions
Conclusions 36
Background material BCBS (2008) Principles for Sound Liquidity Risk Management and Supervision, Basel BCBS (2009) International framework for liquidity risk measurement, standards and monitoring , Basel CEBS (2008) CEBS’S Technical Advise on Liquidity Risk Management (2 nd part), London CEBS (2009) Guideline on Liquidity Buffers & Survival Periods, London CEBS (2010 a) High level principles for risk management, London CEBS (2010 b) Guidelines on Stress Testing (GL 32), London ECB (2008) Report on EU banks liquidity stress tests and contingency funding plans , Frankfurt Schmitz, S. W. , A. Ittner (2007) Why central banks should look at liquidity risk, Quarterly Journal Central Banking Vol. XVII No. 4, 32 -40 Schmitz, S. W. (2011) The Impact of the Basel III Liquidity Standards on the Implementation of Monetary Policy , mimeo Oe. NB, Vienna Liquidity Risk Management Workshop, Risk. Minds 2010 37
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