General considerations
Competent authorities should assess the institution’s material liquidity and funding risks and whether the institution’s liquidity and funding provides appropriate coverage of the risks assessed. The purpose of this title is to provide methodologies to be considered when assessing individual risks, and risk management and controls. It is not intended to be exhaustive, and gives leeway to competent authorities to take into account other additional criteria that may be deemed relevant based on their experience and the specific features of the institution in their assessment of the institution’s liquidity and funding.
When assessing the inherent liquidity and funding risk, and the adequacy of the liquidity and funding risk internal control framework, competent authorities should evaluate inter alia the institution’s overall compliance with the legal acts published separately on the EBA website as referred to in paragraph 12.
The methodology comprises six main components:
assessment of inherent liquidity risk (section 8.2);
assessment of inherent funding risk (section 8.3);
assessment of liquidity and funding risk management and control framework (section 8.4);
summary of findings and scoring for liquidity and funding adequacy (section 8.5);
determination of potential SREP liquidity and funding risk measures (section 8.6);
benchmarking and setting of quantitative liquidity and funding requirements (section 8.7).
The assessment flow is documented graphically in figure 3.
Figure 3. Elements of the assessment of risks to liquidity and funding
In the assessment of risks to liquidity and funding, competent authorities should review, among others, the institution’s liquidity coverage ratio (LCR), as specified in the Commission Delegated Regulation (EU) 2015/61(44) and the net stable funding ratio (NSFR), as established in Title IV of Part Six of the Regulation (EU) No 575/2013, and the institution’s ILAAP. They should also consider the recommendations, guidelines and guidance included in LCR and NSFR implementation reports issued by the EBA, as well as warnings and recommendations issued by macroprudential authorities or the ESRB. However, these guidelines extend the scope of the assessment beyond those minimum requirements, aiming to allow competent authorities to form a comprehensive view of the risks.
Competent authorities should ensure the assessment pays attention to how the institution’s business model impacts its liquidity and funding risk profile, taking into account the outcome of the business model analysis conducted under Title 4. In doing so, they should pay attention to how the institution’s business model has changed over time and whether this has resulted in any increased risks. Competent authorities should monitor key quantitative indicators to capture trends and inform this analysis.
To assist with the quantitative assessment of the institution’s liquidity and funding risks and adequacy, competent authorities should refer to the additional guidance available in section 8.7 on benchmarking and setting quantitative liquidity and funding requirements.
Competent authorities shall also evaluate any information with a potential impact on liquidity and funding position (e.g. from AML/CFT competent authorities).
In reviewing the quality of the institution’s organisational and risk management arrangements for managing liquidity and funding risk, competent authorities should ensure that those covers all of its material legal entities, branches and subsidiaries.
Competent authorities should take into account the impact of ESG risks on the inherent liquidity and funding risks as well as the adequacy of the liquidity and funding risk management and control framework related to ESG risks, giving priority to environmental risks.
The outcome of the assessment of each individual risk should be reflected in a summary of findings and an explanation of the main risk drivers and a score, as explained in the following sections.