Assessment of inherent liquidity risk
Competent authorities should assess the institution’s short- and medium-term liquidity risk over an appropriate set of time horizons, including intraday periods, to ensure that the institution maintains adequate levels of liquidity buffers, under both normal and stressed conditions. This assessment includes the following elements:
For the assessment of liquidity needs, buffers and counterbalancing capacity under normal conditions, competent authorities should support the analysis with evidence from the reporting templates for additional monitoring metrics as specified in the ITS on supervisory reporting. When assessing liquidity needs in stressed conditions, competent authorities should also consider actions the institutions may take to preserve its reputation/franchise. This should consider reputational effects on large wholesale and retail counterparties including those potentially triggered via social or other channels. Competent authorities may perform less granular intraday liquidity risk evaluation and liquidity stress testing, where this is justified by lower materiality of these sources of risk, especially for Category 3 and Category 4 institutions, and taking into account the results of the ILAAP.
Evaluation of liquidity needs in the short and medium term
Competent authorities should assess the institution’s liquidity needs in the short and medium term under both normal and stressed conditions. They should take into account the effect on the institution’s stressed liquidity needs before 30 days, between for example 30 days and 3 months, and after for example three to twelve months of severe but plausible stresses covering idiosyncratic, market-wide and combined shocks. Competent authorities should also analyse the size, location and currency of the liquidity needs and the separate impacts of shocks in its different material currencies to reflect currency convertibility risk and the risk of possible disruptions in the access to foreign exchange markets (including idiosyncrasies such as, for example, the loss of access to a correspondent banking account denominated in a foreign currency).
Competent authorities should support the assessment of short-term liquidity risk by analysing the LCR, as specified in Commission Delegated Regulation (EU) 2015/61, including whether the LCR is correctly measured and reported and adequately identifies the institution’s coverage of liquidity needs. Competent authorities should also assess whether institutions are periodically testing their ability to report the LCR on a daily basis in order to make sure that institutions will be able to deliver reliable data in accordance with Article 414 of Regulation (EU) 575/2013 when needed.
In evaluating the impact of shocks on the institution’s liquidity needs, competent authorities should take into account all material sources of liquidity risk for the institution, in particular:
the possibility that any applicable EU regulatory requirement would not adequately identify the institution’s liquidity needs in the event of the type of stress scenario used for the requirement, including where maturities are shorter than 30 days;
risks arising in respect of wholesale counterparties regarding on-balance-sheet items and funding concentrations. Competent authorities should have regard to the volatility of funding provided by counterparties that all belong to the most material sectors serviced and potential contagion risks. In this respect, particular attention should be paid to funding gathered through new business lines and distribution channels, as well as from clients running activities bearing an increased level of risk (crypto-asset issuers and services providers);
risks arising in respect of contingent cash flows/off-balance-sheet items (for example, credit lines, margin calls) and activities (for example, liquidity support for unconsolidated special-purpose vehicles beyond contractual obligations;
inflows and outflows on a gross basis, as well as a net basis; where there are very large inflows and outflows, competent authorities should pay specific attention to the risk to the institution when inflows are not received when expected, even when the net outflow risk is limited;
risks arising in respect of retail counterparties including funding concentrations. For this purpose, competent authorities should make use of the methodology on the classification of retail deposits into different risk buckets, pursuant to Articles 24 and 25 of Commission Delegated Regulation (EU) 2015/61;
the risk that excessive risks in the medium- to long-term funding profile will adversely affect the behaviour of counterparties relevant to the short-term liquidity position;
Competent authorities should ensure that their assessment of the institution’s short-term liquidity needs considers the impact of digitalisation (including for example instant payments) and potential for the spread of information on social media to increase the speed of withdrawals in a stressed scenario.
Evaluation of intraday liquidity risk
Competent authorities should assess the institution’s exposure to intraday liquidity risk for a selected time horizon. This assessment should include, as a minimum, an evaluation of intraday liquidity available or accessible under normal conditions as well as under financial or operational stress (e.g. IT failures, legal constraints on the transfer of funds, suspension/termination of access to correspondent banking services and/or clearing services for currencies, commodities or instruments significant for the institution). This should particularly consider how in times of stress, an institution´s increased intraday collateral needs may limit its ability to use a liquidity buffer to cover stressed outflows when needed.
For those jurisdictions where reporting on intraday risk is not yet available, competent authorities may rely on the institution’s own analysis of intraday liquidity risk.
Evaluation of liquidity buffer and counterbalancing capacity
Competent authorities should assess the adequacy of the institution’s liquidity buffer and counterbalancing capacity regarding the characteristics of the assets considered under different stress scenarios within a month as well as over different time horizons, potentially up to one year, including overnight. The assessment should include consideration of the classification and quality of liquid assets (as specified in the Commission Delegated Regulation (EU) 2015/61), their compliance with general and operational requirements for high-quality liquid assets, and whether the liquidity buffer and counterbalancing capacity are in line with the institution’s risk appetite.
Competent authorities should consider factors that might reduce the institution’s ability to monetise its liquid assets in a timely manner during a stress period including such as high concentrations with individual counterparties or type of assets, assets in the buffer that are encumbered or borrowed, and the denomination of liquid assets in a different currency to the institution’s liquidity needs. Competent authorities should also consider the likely value of committed liquidity facilities that may be included in the counterbalancing capacity.
Competent authorities should review (where applicable) the appropriateness of the institution’s assumptions concerning its ability to access repo markets and central bank funding in a stressed period, including regarding the suitability and availability of assets to serve as collateral. They should take into account whether the institution tests its market access by selling or repo-ing on a periodic basis. Equally they should review the institutions’ assumptions regarding time to liquidity under stress.
Supervisory liquidity stress testing
Competent authorities should run their own liquidity stress tests to independently assess short- and medium-term liquidity risks. Stress scenarios should be anchored to the 30-day LCR stress assumptions, but competent authorities may extend the scope of their assessment by exploring risks within 30 days as well as beyond 30 days, and altering LCR assumptions to reflect risks not adequately covered in the LCR. This should include a supervisory stress test combining institution-specific and market-wide stress.