Assessing risks to liquidity and funding and SREP liquidity and funding assessment
8.1General 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.
8.2Assessment 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.
8.3Assessment of inherent funding risk
Competent authorities should assess the institution’s funding risk and whether the medium- and long-term assets and off-balance-sheet items are adequately met with a range of stable funding instruments under both normal and stressed conditions. This assessment includes the following elements:
Evaluation of the institution’s funding profile
Competent authorities should assess the appropriateness of the institution’s funding profile, including both medium- and long-term contractual and behavioural mismatches, in relation to its business model, strategy and risk appetite. They should take into account whether the institution’s medium- and long-term assets and off-balance-sheet items are adequately met with a range of stable funding instruments, pursuant to Article 413 of Regulation (EU) No 575/2013. Competent authorities should support this assessment by analysing the NSFR as specified in Title IV of Part Six of Regulation (EU) No 575/2013 and assess whether this has been correctly reported.
Competent authorities should consider the impact on the institution’s funding profile of any (local) regulatory and contractual factors affecting the behavioural characteristics of funding providers (e.g. regulations regarding clearing, bail-in, deposit guarantee schemes, as they may influence the behaviour of funding providers).
Competent authorities should assess whether potential shortcomings arising from the institution’s funding profile, such as maturity mismatches breaching acceptable boundaries, excessive concentrations of funding sources, excessive levels of asset encumbrance, or inappropriate or unstable funding of long-term assets could lead to an unacceptable increase in the cost of funding and a loss of funding access for the institution. In particular, assumptions regarding the stickiness of funding attracted via channels that rely on fintech or are less traditional for example online deposit platforms – need to be closely assessed when planning or designing stress scenarios.
Evaluation of risks to the stability of the funding profile
Competent authorities should consider factors that may reduce the stability of the funding profile in relation to the type and characteristics of assets, off-balance-sheet items and liabilities. They should take into account the structural maturity mismatch between assets and liabilities (including the impact of any currency mismatches), appropriate structural funding metrics (e.g. loan/deposit ratio, customer funding gap and behaviourally adjusted maturity ladder), and funding characteristics that could indicate increased ML/TF risks and concerns from a prudential perspective. Competent authorities should also consider impact of losses on the stability of funding; knowing that funding providers may be sensitive to much lower losses than those that would endanger capital ratios.
Competent authorities should assess risks to the sustainability of the funding profile arising from concentrations in funding sources (particularly in the type of funding instruments used, specific funding markets, single or connected counterparties). For example, they should consider the characteristics of the most material sectors serviced by the institution and how this impacts the institution’s funding risk profile, paying particular attention to exposures to cyclical or volatile sectors.
Competent authorities should also assess the risk that asset encumbrance may have an adverse effect on the market’s appetite for the unsecured debt of the institution (in the context of the specific characteristics of the market(s) in which the institution operates and the institution’s business model).
Evaluation of actual market access
Competent authorities should be aware of the institution’s actual market access and current and future threats to this market access including disruptions in the access to foreign exchange markets (including idiosyncratic). For the assessment, they should take into account the degree to which the institution makes high demands on particular markets or counterparties (including central banks) relative to those markets’/counterparties’ capacity, any significant or unexpected changes in the issuance of debt, the risk that news about the institution may negatively influence the market (perception/confidence) and therefore market access, and signs that short-term liquidity risks may reduce the access the institution has to its major funding markets.
Evaluation of expected change in funding risks based on the institution’s funding plan
Competent authorities should assess the expected change in funding risks based on the institution’s funding plan and form a view on the feasibility of the plan (such as backtesting, considering alternative scenarios).
8.4Assessment of liquidity and funding risk management and control framework
To achieve a comprehensive understanding of the institution’s liquidity and funding risk profile and their interconnectedness, competent authorities should also review the governance and risk management framework underlying its liquidity and funding risk. To this end, competent authorities should assess:
the liquidity risk and funding strategy and liquidity and funding risk appetite;
the organisational framework, policies and procedures;
risk identification, measurement, management, monitoring and reporting;
the institution’s liquidity/funding-specific stress testing;
the internal control framework for liquidity risk and funding risk management;
the institution’s liquidity contingency plans and recovery plans;
the institution’s funding plans.
Liquidity and funding risk strategy and risk appetite
Competent authorities should assess whether the institution has a sound, clearly formulated, documented and communicated liquidity/funding risk strategy and appetite, approved by the management body. For this assessment, among other factors, competent authorities should take into account the role of the management body in setting, approving and reviewing the liquidity/funding risk strategy and appetite (including its major underlying assumptions), the proper implementation of this strategy by the management body as well as its appropriateness for the institution given its business model, overall risk tolerance, role in the financial system, financial condition and funding capacity.
Organisational framework, policies and procedures
Competent authorities should assess whether the institution has an appropriate organisational framework and governance arrangements for liquidity and funding risk management, including a robust ILAAP framework in line with paragraph 911 of Title 5 of these Guidelines. Further, they should assess whether the institution has implemented appropriate measurement and control functions, with sufficient human and technical resources to develop and implement these functions and to carry out the required monitoring tasks. The liquidity risk control and monitoring of systems and processes should be controlled by an independent function.
Competent authorities should assess whether the institution has appropriate policies and procedures for the management of liquidity and funding risk and whether these are consistent with the institution’s liquidity risk appetite. This includes assessment of whether the policies and procedures are properly defined, formalised and effectively communicated throughout the institution. The management body should approve and regularly review the policies and procedures, and these should be implemented by senior management.
Competent authorities should assess the adequacy of the institution’s approach to maintaining market access in its significant funding markets, including any testing of market access that has been undertaken, the institution’s approach to maintaining an ongoing presence in the markets (for specific small institutions or specialised business models, testing of access to markets may not be relevant), the institution’s approach to developing strong relationships with funding providers, and any evidence that the institution would continue to have ongoing market access in times of stress.
Risk identification, measurement, management, monitoring and reporting
Competent authorities should assess whether the institution has an appropriate framework and IT systems for identifying and measuring liquidity and funding risk, in line with the institution’s size, complexity, risk appetite and risk-taking capacity. They should take the following factors into account:
whether the institution has implemented appropriate methods for projecting its cash flows over an appropriate set of time horizons, assuming business-as-usual and stress situations, and comprehensively across material risk drivers;
whether the institution uses appropriate key assumptions and methodologies, which are regularly reviewed, recognising interaction between different risks (credit, market, IRRBB etc.) arising from both on- and off-balance sheet items;
whether the institution understands its ability to access financial instruments wherever they are held, having regard to any legal, regulatory and operating restrictions on their use, including, for example, the inaccessibility of assets due to encumbrance during different time horizons.
Competent authorities should assess whether institutions have an appropriate reporting framework for liquidity and funding risk that has been agreed by the senior management. They should take into account the quality of information systems and internal information flows used to generate reporting and whether the reporting is understandable for the target audience, accurate and usable (e.g. timely, not overly complex, within the correct scope). The reporting should be provided regularly to appropriate recipients (such as the management body, senior management or an asset-liability committee).
Competent authorities should assess the adequacy of the process of measuring intraday liquidity risk, especially for those institutions that participate in payment, settlement and clearing systems. They should take into account whether the institution adequately monitors and controls cash flows and liquid resources available to meet intraday requirements and forecasts when cash flows will occur during the day, and whether the institution carries out adequate specific stress testing for intraday operations, also considering business developments (e.g. possibility for instant payments).
Competent authorities should assess whether the institution has an adequate set of liquidity and funding indicators. They should take into account:
whether the indicators adequately reflect the institution’s liquidity risk profile including the degree of diversification of assets in the liquidity buffer and the consistency between the currency denomination of their liquid assets and the distribution by currency of their liquidity outflows;
whether the indicators adequately cover key liquidity risk aspects related to potential cliff risks such as the concentration of outflows maturities (considering also any potential early withdrawal of liabilities) and central bank support programmes;
whether the indicators permit identification of the institution’s structural funding vulnerabilities, including any concentrations in particular markets, currencies, counterparties, and maturities;
whether the indicators provide an insight into the ‘stickiness’ of the institutions’ funding (independent of what is assumed in the LCR or NSFR), including the breakdown into homogenous categories in accordance with their risk properties, and the proportion of deposits outside the scope of a guarantee/insurance scheme.
Institutions should be able to demonstrate that the indicators are adequately documented, periodically revised, used as inputs to define the risk appetite of the institution, part of management reporting and used for setting operating limits.
Institution’s liquidity- and funding-specific stress testing
Competent authorities should assess whether an institution has implemented adequate liquidity-specific stress testing, in accordance with the EBA Guidelines on institutions’ stress testing(55):
to understand the impact of adverse events on its risk exposure and to be able to assess the adequacy of its liquid assets, counterbalancing capacity and funding structure;
to cover risks that may crystallise during different types of stress scenarios and/or to address risks posed by control, governance or other deficiencies.
Competent authorities should take into account whether the framework permits the institution to:
determine the institution’s survival horizon given its existing liquidity buffer and stable sources of funding, and taking into account the institution’s risk appetite, during a severe but plausible liquidity stress period;
analyse the impact of stress scenarios on its consolidated group-wide liquidity position and on the liquidity position of individual entities and business lines;
understand where risks could arise, regardless of its organisational structure and the degree of centralised liquidity risk management.
Competent authorities should ensure that the institution provides the modelled impact of different types of stress scenarios (as explained in the EBA Guidelines on institutions’ stress testing), as well as a number of sensitivity tests (on the basis of proportionality). The stress scenarios and shocks simulated in them should not only be based on the past, but also make use of hypothetical stress scenarios based on expert judgement. Competent authorities should analyse whether the following scenarios are considered as a minimum:
An important aspect that competent authorities should consider when assessing the institution’s stress testing framework is the modelling of the impact of the hypothetical stress scenario(s) on the institution’s cash flows and on its counterbalancing capacity and survival horizon, and whether the modelling reflects the different impacts that economic stress may have on both an institution’s assets and its in- and outflows.
Competent authorities should also assess whether the institution takes a conservative approach to setting stress testing assumptions. Depending on the type and severity of the scenario, competent authorities should consider, as relevant, the appropriateness of a number of assumptions, in particular:
the run-off of retail funding;
the reduction of secured and unsecured wholesale funding;
the correlation between funding markets and diversification across different markets;
additional contingent off-balance sheet exposures;
funding tenors (e.g. where the funding provider has call options);
the impact of any deterioration of the institution’s credit rating;
FX convertibility and access to foreign exchange markets and correspondent banking accounts;
the ability to transfer liquidity across entities, sectors and countries;
estimates of future balance-sheet growth;
due to reputational risks, an implicit requirement for the institution to roll over assets and to extend or maintain other forms of liquidity support.
Competent authorities should assess whether the management framework of the institution’s liquidity-specific stress testing is appropriate and whether it is properly integrated into the overall risk management strategy. They should take into account:
whether the extent and frequency of stress tests are appropriate to the nature and complexity of the institution, its liquidity risk exposures and its relative importance in the financial system;
whether the outcomes of stress testing are integrated into the institution’s strategic planning process for liquidity and funding and used to increase the effectiveness of liquidity management in the event of a crisis, including in the institution’s liquidity contingency and recovery plan;
whether the institution has an adequate process for identifying suitable risk factors for conducting stress tests, having regard to all material vulnerabilities that can undermine the liquidity position of the particular institution;
whether assumptions and scenarios are reviewed and updated sufficiently frequently;
where the liquidity management of a group is being assessed, whether the institution pays adequate attention to any potential obstacles to the transfer of liquidity within the group.
Liquidity and funding risk internal control framework
Competent authorities should assess whether the institution has a strong and comprehensive internal limit and control framework, and sound safeguards to mitigate its liquidity and funding risk in line with its risk appetite and to ensure the availability of a diversified funding structure. They should take into account whether the limit and control framework is adequate for the institution’s complexity, size and business model and reflects the different material drivers of liquidity risk and the outcomes of liquidity stress tests.
Competent authorities should consider whether the institution has limits to ensure consistency between the currency denomination of their liquid assets and the distribution by currency of their net liquidity outflows in accordance with Article 8(6) of Commission Delegated Regulation (EU) 2015/61.
Competent authorities should assess whether the limits are approved and regularly reviewed by the competent bodies of the institution and communicated to all relevant business lines. This process, along with how the institution monitors compliance with limits and the escalation process for breaches, should be clearly documented in its procedures.
Competent authorities should assess whether the institution has implemented an adequate transfer pricing system as part of the liquidity risk control framework, which incorporates all relevant liquidity costs, benefits and risks. Competent authorities should take into account whether the transfer pricing mechanism allows management to give appropriate incentives for managing liquidity risk, and whether the system and its calibration are reviewed and updated appropriately given the size and complexity of the institution. In addition, competent authorities should assess whether the institution’s policy on incorporating the funds transfer pricing (FTP) methodology into the internal pricing framework is used for assessing and deciding on transactions with customers (this includes both sides of the balance sheet, e.g. granting loans and taking deposits).
Competent authorities should assess whether the institution has adequate controls regarding the liquid-assets buffer, including concentration limits and appropriate ongoing monitoring of the adequacy of the buffer and for changes in market conditions that could affect the institution’s ability to liquidate its assets quickly.
Liquidity contingency plans
Competent authorities should assess whether the institution’s liquidity contingency plan (LCP) adequately specifies the policies, procedures and action plans for responding to severe potential disruptions to the institution’s ability to meet its liquidity needs and fund itself. They should take into account the content and scope of contingency funding measures included in the LCP, and in particular factors such as:
whether the LCP adequately explains governance arrangements for its activation and maintenance;
whether the LCP appropriately reflects the institution’s liquidity- and funding-specific and wider risk profile;
whether the institution has a framework of liquidity early warning indicators, including among others those established as liquidity indicators in the EBA GL on recovery plan indicators that are likely to be effective in enabling the institution to identify deteriorating market circumstances in a timely manner and to quickly determine what actions need to be taken;
whether the LCP describes clearly that the LCR liquidity buffer is designed to be used in case of stress, even if that leads to LCR values below 100%, including that it is part of the expected management of liquidity risk under stress that subsequent communications to senior management take place if established lower LCR values are reached. The LCP should clearly reflect and describe how liquidity risk should be managed under stress to steer towards targeted LCR levels as closely as possible;
whether the LCP clearly articulates all material (potential) funding sources, including the estimated amounts available for the different sources of liquidity and the estimated time needed to obtain funds from them;
whether the measures are in line with the institution’s overall risk strategy and liquidity risk appetite;
the appropriateness of the assumptions regarding the role of central bank funding in the institution’s LCP. Examples of factors competent authorities may consider could include the institution’s views on:
I. the current and future availability of potential alternative funding sources connected to central bank lending programmes; II. the types of lending facilities, the acceptable collateral and the operational procedures for accessing central bank funds; III. the circumstances under which central bank funding would be needed, the amount required and the period for which such a use of central bank funding would probably be required.
Competent authorities should assess whether the actions described in the LCP are feasible in relation to the stress scenarios in which they are meant to be taken. They should take into account factors such as:
the level of consistency and interaction between the institution’s liquidity-related stress tests, its LCP, its liquidity early warning indicators and, where applicable, its liquidity related recovery plan;
whether the actions defined in the LCP appear likely to enable the institution to react adequately to a range of possible scenarios of severe liquidity stress, including institution-specific and market-wide stress, as well as the potential interaction between them; and whether the actions defined in the LCP are prudently quantified in terms of liquidity-generating capacity under stressed conditions and the time required to execute them, taking into account operational requirements such as pledging collateral at a central bank.
Competent authorities should assess the appropriateness of the institution’s governance framework with respect to its LCP. They should take into account factors such as:
Funding plans
Competent authorities should assess whether the funding plan is feasible and appropriate in relation to the nature, scale and complexity of the institution, its current and projected activities and its liquidity and funding profile. They should take into account factors such as:
whether the funding plan addresses alternative scenarios. Competent authorities should pay particular attention to the robustness of the plan for supporting the projected business activities under adverse scenarios;
the expected change in the institution’s funding profile arising from the execution of the funding plan and whether this is suitable given the institution’s activities and business model;
whether the funding plan supports any required or desired improvements in the institution’s funding profile;
their own view on the (changes in) market activity planned by institutions in their jurisdiction on an aggregated level, and what that means for the feasibility of individual funding plans; and
whether the funding plan is:
I. integrated with the overall strategic plan of the institution;
II. consistent with its business model;
III. consistent with its liquidity risk appetite;
In addition, competent authorities may consider:
whether the institution adequately analyses and is aware of the appropriateness and adequacy of the funding plan given the institution’s current liquidity and funding positions and their projected development. As part of this, competent authorities may consider whether the institution’s senior management can explain why the funding plan is feasible and where its weaknesses lie;
the institution’s policy for determining what funding dimensions and what markets are significant to the institution (and whether it is adequate);
the time horizon envisaged by the institution for migration to a different funding profile, if required or desired, bearing in mind that there may be risks involved if migration towards the end state is either too fast or too slow;a
whether the funding plan contains different strategies and clear management procedures for timely implementation of strategy changes.
Competent authorities should assess whether the institution’s funding plan is appropriately implemented. As a minimum, they should take into account:
In addition, competent authorities may take into account whether the institution is able to reconcile the funding plan with the data provided to competent authorities in the funding plan template.
Competent authorities should consider the quality of the institution’s processes for monitoring the execution of the funding plan and its ability to react to deviations in a timely manner. For this assessment, competent authorities should take into account factors such as:
the quality of the updates to (senior) management regarding the current status of the execution of the funding plan;
whether the funding plan envisages alternative fall-back measures to be implemented if there are changes in the market conditions; and
the policy and practice of the institution regarding the regular review, back-testing, and updating of the funding plan when the actual funding raised significantly differs from the funding plan.
8.5Summary of findings, scoring and supervisory measures
Following the above assessment, competent authorities should form a view on the institution’s liquidity and funding risks and the capacity of the institutions’ liquidity resources to cover/mitigate these. This view should be reflected in a summary of findings, accompanied by a liquidity and funding adequacy score based on the considerations specified in table 17. The liquidity and funding adequacy score should reflect the view of competent authorities on whether the existing liquidity resources provide appropriate coverage of the liquidity and funding risks. Competent authorities may consider the use of intermediate scores for liquidity and funding risk where deemed relevant.
In setting the liquidity and funding adequacy score, competent authorities should, where applicable, consider the score of the liquidity overall recovery capacity in recovery planning (weak, adequate with potential room for improvement, satisfactory) as specified in paragraphs 41-43 of the EBA Guidelines on overall recovery capacity in recovery planning(57). The consideration of the overall recovery capacity score in the context of liquidity adequacy is especially relevant in case of a ‘weak’ overall recovery capacity score for liquidity.
Risk score | Supervisory Considerations in relation to inherent Considerations in relation to view risk adequate management and controls |
1 | • There is non-material/very low risk arising from mismatches (e.g. between maturities, currencies). • The size and composition of the liquidity buffer is adequate and appropriate. • The level of other drivers of • There is consistency between the liquidity risk (e.g. reputational risk, institution’s liquidity/funding risk inability to transfer intra-group policy and strategy and its overall liquidity) is not material/very low. strategy and risk appetite. • The institution’s counterbalancing • The organisational framework for There is a low capacity and liquidity buffers are liquidity and funding risk is robust risk of comfortably above supervisory with clear responsibilities and a significant quantitative requirements and are clear separation of tasks between prudential expected to remain so in the future. risk-takers and management and impact on the • The free flow of liquidity between control functions. institution entities in the group, where • Liquidity and funding risk considering relevant, is not impeded, or all measurement, monitoring and the level of entities have a counterbalancing reporting systems are appropriate. inherent risk capacity and liquidity buffers above • Internal limits and the control and the supervisory requirements. framework for liquidity risk are management • There is non-material/very low risk sound and are in line with the and controls. from the institution’s funding institution’s risk management profile or its sustainability. strategy and risk appetite. • The risk posed by the stability of • The institution has a plausible and funding is not material. credible liquidity contingency plan • Other drivers of funding risk (e.g. that has the potential to be reputational risk, access to funding effective if required. markets) are not material/very low. • The composition and stability of longer-term funding (>1 year) pose non-material/very low risk in relation to the activities and business model of the institution. |
Risk score | Supervisory Considerations in relation to inherent Considerations in relation to view risk adequate management and controls |
• The overall recovery capacity of the institution with regard to liquidity resulting from the supervisory assessment, is ‘satisfactory’. | |
2 | • Mismatches (e.g. between maturities, currencies) entail low to medium risk. • The risk posed by the size and composition of the liquidity buffer is low to medium. • The level of other drivers of liquidity risk (e.g. reputational risk, inability to transfer intra-group liquidity) is low to medium. • The institution’s counterbalancing capacity and liquidity buffers are above supervisory quantitative There is a requirements, but there is a risk medium-low that they will not remain so in the risk of future. significant • The free flow of liquidity between prudential entities in the group, where impact on the relevant, is or could be marginally institution impeded. considering • The risk posed by the institution’s the level of funding profile and its sustainability inherent risk is low to medium. and the • The risk posed by the stability of management funding is low to medium. and controls. • Other drivers of funding risk (e.g. reputational risk, access to funding markets) are low to medium. • The composition and stability of longer-term funding (>1 year) pose a low level of risk in relation to the activities and business model of the institution. • The overall recovery capacity of the institution with regard to liquidity, resulting from the supervisory assessment, is ‘satisfactory’ or ‘adequate with room for improvement’. |
3 | There is a • Mismatches (e.g. between • There is not full consistency medium-high maturities, currencies) entail between the institution’s liquidity risk of medium to high risk. and funding risk policy and strategy significant • The risk posed by the size and and its overall strategy and risk prudential composition of the liquidity buffer appetite. impact on the is medium to high. • The organisational framework for institution • The level of other drivers of liquidity and funding risk does not considering liquidity risk (e.g. reputational risk, sufficiently separate the level of |
Risk score | Supervisory Considerations in relation to inherent Considerations in relation to view risk adequate management and controls |
inherent risk inability to transfer intra-group responsibilities and tasks between and the liquidity) is medium to high. risk-takers and management and management • The institution’s counterbalancing control functions. and controls. capacity and liquidity buffers are • Liquidity and funding risk deteriorating and/or are below measurement, monitoring and supervisory quantitative reporting systems are not requirements, and there are undertaken with sufficient accuracy concerns about the institution’s and frequency. ability to restore compliance with • Internal limits and the control these requirements in a timely framework for liquidity and funding manner. risk are not in line with the • The free flow of liquidity between institution’s risk management entities in the group, where strategy or risk appetite. relevant, is impeded. • The institution has a liquidity • The risk posed by the institution’s contingency plan that is unlikely to funding profile and its sustainability be effective or the institution has is medium to high. no liquidity contingency plan, or • The risk posed by the stability of one that is manifestly inadequate funding is medium to high. • Other drivers of funding risk (e.g. reputational risk, access to funding markets) are medium to high. • The composition and stability of longer-term funding (>1 year) pose a medium level of risk in relation to the activities and business model of the institution. • The overall recovery capacity of the institution with regard to liquidity, resulting from the supervisory assessment, is ‘adequate with room for improvement’ or ‘weak’. | |
4 | • Mismatches (e.g. between maturities, currencies) entail high risk. • The risk posed by the size and There is a high composition of the liquidity buffer risk of is high. significant • The level of other drivers of prudential liquidity risk (e.g. reputational risk, impact on the inability to transfer intra-group institution liquidity) is high. considering • The institution’s counterbalancing the level of capacity and liquidity buffers are inherent risk rapidly deteriorating and/or are and the below the supervisory quantitative management requirements, and there are and controls. serious concerns about the institution’s ability to restore compliance with these requirements in a timely manner. |
Risk score | Supervisory Considerations in relation to inherent Considerations in relation to view risk adequate management and controls |
• The free flow of liquidity between entities in the group, where relevant, is severely impeded. • The risk posed by the institution’s funding profile and its sustainability is high. • The risk posed by the stability of funding is high. • Other drivers of funding risk (e.g. reputational risk, access to funding markets) are high. • The composition and stability of longer-term funding (>1 year) pose a high level of risk in relation to the activities and business model of the institution. • The overall recovery capacity of the institution with regard to liquidity, resulting from the supervisory assessment, is ‘weak’. |
Following the liquidity and funding adequacy scoring of section 8.5, competent authorities should determine whether it is necessary to set specific liquidity and funding requirements to cover risks to liquidity and funding to which an institution is or might be exposed.
The next table provides a non-exhaustive list of qualitative and quantitative supervisory measures that competent authorities may use in case a specific deficiency is identified. Competent authorities may apply additional supervisory measures (including quantitative measures in accordance with Article 104(1)(a) (opens EUR-Lex in a new tab) of Directive 2014/36/EU (opens EUR-Lex in a new tab) or a combination of them if these are deemed more appropriate to address the identified deficiencies.
Where competent authorities determine that quantitative measures may be necessary, they should refer to the additional guidance in the subsequent section on benchmarking and setting quantitative liquidity and funding measures.
It is relevant to note that part of the measures mentioned in table 18 are of a qualitative nature. Where fundamental weaknesses arise, particularly in terms of management of liquidity and funding, qualitative measures should be prioritised, where possible.
Table 18. Potential and non-exhaustive supervisory measures for liquidity and funding risk
Potential supervisory measures for competent authorities in accordance with Articles 102, 104(1), points (b), (e), (f), (j), (k), (i), and (n) and Article 105 of Directive 2013/36/EU, Article 8 of Commission Delegated Regulation (EU) 2015/61, and Article 428b(5) of Regulation (EU) No 575/2013 A. require institutions to hold an LCR higher than the regulatory minimum, of such a size that shortcomings identified are sufficiently mitigated; B. require institutions to apply a minimum survival period of such length that identified shortcomings are sufficiently mitigated; Potential supervisory measures for competent authorities in accordance with Articles 102, 104(1), points (b), (e), (f), (j), (k), (i), and (n) and Article 105 of Directive 2013/36/EU, Article 8 of Commission Delegated Regulation (EU) 2015/61, and Article 428b(5) of Regulation (EU) No 575/2013 C. require institutions to hold a minimum total amount of liquid assets or counterbalancing capacity, of such a size that identified shortcomings are sufficiently mitigated; D. require institutions to hold a NSFR higher than the regulatory minimum, of such a size that shortcomings identified are sufficiently mitigated; E. require institutions to hold a minimum total amount of available stable funding, of such a size that identified shortcomings are sufficiently mitigated; F. impose specific liquidity requirements, including restrictions on maturity mismatches between assets and liabilities; G. impose administrative penalties or other administrative measures, including prudential charges; H. impose requirements on the concentration of the liquid assets held, including:
requirements for the composition of the institution’s liquid-assets profile in respect of counterparties,
currency; and/or
caps, limits or restrictions on funding concentrations.
I. impose restrictions on short-term contractual or behavioural maturity mismatches between assets and liabilities, including:
limits on maturity mismatches (in specific time buckets) between assets and liabilities;
limits on minimum survival periods; and/or
limits on dependency on certain short-term funding sources, such as money market funding.
J. impose additional or more frequent reporting requirements on liquidity positions, including:
the frequency of regulatory reporting on LCR; and/or
the frequency and granularity of other liquidity reports, such as ‘additional monitoring metrics’.
K. require action to be taken to address deficiencies identified with regard to the institution’s ability to identify, measure, monitor and control liquidity risk, by means including:
enhancing its stress testing capacity to improve its ability to identify and quantify material sources of
liquidity risk to the institution;
enhancing its ability to monetise its liquid assets;
enhancing its liquidity contingency plan and liquidity early warning indicators framework; and/or
enhancing reporting of liquidity management information to the institution’s management body and
senior management. L. require action to be taken to amend the institution’s funding profile, including:
reducing its dependency on certain (potentially volatile) funding markets,, such as wholesale funding
markets, such as wholesale funding;
reducing the concentration of its funding profile with respect to counterparties, peaks in the long-term
maturity profile, (mismatches in) currencies, etc.; and/or
reducing the amount of its encumbered assets, potentially differentiating between total encumbrance
and overcollateralisation (e.g. for covered bonds, margin calls). M. Require additional or more frequent reporting on the institution’s funding positions, including:
increased frequency of regulatory reporting relevant to the monitoring of the funding profile (such as
the NSFR report and ‘additional monitoring metrics’); and/or
increased frequency of reporting on the institution’s funding plan to the supervisors.
N. Require actions to be taken to address deficiencies identified with regard to the institution’s control of funding risk, including:
requiring actions to be taken to address deficiencies identified with regard to the institution’s control of
funding risk, including:
enhancing reporting on funding risk to the institution’s management body and senior management;
restating or enhancing the funding plan; and/or
placing limits on its risk appetite;
enhancing the institution’s stress testing capabilities by means including requiring the institution to
cover a longer stress period.
When setting structural, long-term supervisory requirements, competent authorities should consider the need for additional short/medium-term liquidity and/or own fund requirements as an interim solution to mitigate the risks that persist while the structural requirements produce the desired effects.
Where competent authorities conclude that there is a high risk that the institution’s cost of funding will increase notably, they should consider requesting changes to the funding structure to mitigate the funding cost risk, or even own funds measures (as covered in Title 7) to compensate for the P&L impact if the institution cannot pass the increased costs of funding to its customer.
8.6Benchmarking and setting of quantitative liquidity and funding requirements
Determination of specific quantitative liquidity and funding requirements
To support their liquidity and funding adequacy scoring and calibrate specific quantitative requirements where deemed potentially necessary (e.g. any of the measure referred to in table 18 above that are quantitative), competent authorities should consider supervisory liquidity and funding benchmarks as quantitative tools. They should be used to provide a prudent, consistent, transparent and comparable benchmark with which to calculate and compare specific quantitative liquidity requirements for institutions with similar business models and risk profiles. In developing supervisory benchmarks, competent authorities should use supervisory assessment of risks to liquidity and funding, and the results of supervisory liquidity stress testing.
Competent authorities should use the most appropriate benchmark for the institution’s business model, applying judgement to the outcome of the benchmark to account for business-model-specific considerations where necessary. When competent authorities take supervisory benchmarks into consideration for the determination of specific liquidity requirements, they should explain to the institution the rationale and general underlying principles behind the benchmarks.
Competent authorities should assess the suitability of any benchmarks applied to institutions and continually review and update them in light of the experience of using them.
A key input to the competent authority’s benchmarks for the quantification of specific quantitative liquidity or funding requirements will be the data collected through the supervisory reporting in accordance with Article 415 of Regulation (EU) No 575/2013 covering liquidity and stable funding on an individual and consolidated basis, and additional liquidity monitoring metrics.
Below are some examples of the possible approaches:
Example 1: Institution with an initial liquidity buffer of EUR 1,200 million cumulative inflows and cumulative outflows estimated under stressed conditions are projected through a time horizon of five months. During this time horizon, the institution makes use of the liquidity buffer each time inflows fall below outflows. The result is that, under the stressed conditions defined, the institution would be able to survive for four and a half months, which is longer than the minimum survival period set by supervisors (in this example, three months);
Figure 4. Illustrative example of setting specific quantitative liquidity requirement
b. Example 2: The supervisory minimum survival period is set at three months. An alternative measure to setting a minimum survival period, which can also address the supervisory concern that the gap between inflows and outflows is unacceptably high, is to set a cap on outflows. In the figure below, the mechanism for setting a cap on outflows is shown by the black horizontal bar. An institution is required to reduce its outflows to a level below the cap. The cap can be set for one or more-time buckets and for net outflows (following correction for inflows) or gross outflows. The alternative of adding a buffer requirement instead is shown in the third column.
Figure 5. Illustrative example of setting specific quantitative requirements
Where competent authorities have not developed their own benchmark for the quantification of specific quantitative liquidity requirements, they can apply a benchmark using the following steps particularly in the case of liquidity risk:
perform a comparative analysis, under stressed conditions, of net cash outflows and eligible liquid assets over a set of time horizons: up to one month (including overnight), from one month to three months, and from three months to one year; for this purpose, competent authorities should project net outflows (gross outflows and inflows);
counterbalance capacity throughout different maturity buckets, considering stressed conditions (for example, prudent valuation under stress assumptions for liquid assets versus current valuation under normal conditions and after a haircut), building a stressed maturity ladder for the year ahead;
estimate the survival period of the institution, based on the assessment of the stressed maturity ladder;
determinate the desired/supervisory minimum survival period, taking into account the institution’s risk profile and market and macroeconomic conditions;
if the desired/supervisory minimum survival period is longer than the institution’s current survival period, competent authorities may estimate additional amounts of liquid assets (additional liquidity buffers) to be held by the institution to extend its survival period to the minimum required.
Articulation of specific quantitative liquidity and funding requirements
To articulate the specific quantitative liquidity requirements, competent authorities should use one of the following approaches, unless another approach is considered more appropriate in specific circumstances:
Approach 1 – Require an LCR higher than the regulatory minimum, of such a size that shortcomings identified are sufficiently mitigated.
Approach 2 – Require a minimum survival period of such a length that identified shortcomings are sufficiently mitigated; the survival period can be set either directly, as a requirement, or indirectly, by setting a cap on the amount of outflows over the relevant time buckets considered; competent authorities may require different types of liquid assets (e.g. assets eligible for central banks), to cover risks not (adequately) covered by the LCR.
Approach 3 – Require a minimum total amount of liquid assets or counterbalancing capacity, either as a minimum total amount or as a minimum amount in excess of the applicable regulatory minimum, of such a size that identified shortcomings are sufficiently mitigated; competent authorities may set requirements for the composition of liquid assets, including operational requirements (e.g. direct convertibility to cash, or deposit of the liquid assets at the central bank).
To articulate the specific quantitative stable funding requirements appropriately, competent authorities should use one of the following approaches, unless another approach is considered more appropriate in specific circumstances:
Approach 4 – Require a NSFR higher than the regulatory minimum, of such a size that shortcomings identified are sufficiently mitigated.
Approach 5 – Require a minimum total amount of available stable funding, either as a minimum total amount or as a minimum amount in excess of the applicable regulatory minimum, of such a size that identified shortcomings are sufficiently mitigated.
Competent authorities should structure quantitative liquidity or funding requirements in such a manner as to deliver broadly consistent prudential outcomes across institutions, bearing in mind that the types of requirements may differ between institutions because of their individual circumstances. In addition to the quantity, the structure should specify the expected composition and nature of the requirement. In all cases, it should specify the supervisory requirement and any applicable Directive 2013/36/EU requirements. Liquidity buffers and counterbalancing capacity held by the institution to meet supervisory requirements should be available for use by the institution during times of stress.
Competent authorities should ensure that the institution immediately notifies them if it does not meet the requirements or does not expect to meet the requirements in the short term. The notification should be accompanied by a plan drawn up by the institution for the timely restoration of compliance with the requirements. Competent authorities should assess the feasibility of the plan and take appropriate supervisory measures if the plan is not considered feasible. Where the plan is considered feasible, competent authorities should: determine any necessary interim supervisory measures based on the institution’s circumstances; monitor the implementation of the restoration plan; and closely monitor the institution’s liquidity position, asking the institution to increase its reporting frequency if necessary.
Notwithstanding the above, competent authorities may also set qualitative requirements in the form of restrictions/caps/limits on mismatches, concentrations, risk appetite, quantitative restrictions on the issuance of secured loans, etc., in accordance with the criteria specified in Title 9 of the Guidelines.
Below are some examples of the different approaches for the structure of specific quantitative liquidity requirements:
Example of specific requirements articulation
As of 1 January 2025, and until otherwise directed, Bank X is required to:
Approach 1: ensure that its counterbalancing capacity is at all times equal to or higher than e.g. 125% of its liquidity net outflows as measured in the LCR.
Approach 2: ensure that its counterbalancing capacity results at all times in a survival period that is greater than or equal to three months, measured by the internal liquidity stress test/the maturity ladder/specific metrics developed by the supervisor.
Approach 3:
− ensure that its counterbalancing capacity is at all times equal to or higher than EUR X billion; or − ensure that its counterbalancing capacity is at all times equal to or higher than EUR X billion in excess of the minimum requirement in accordance with the LCR.
Approach 4: ensure that its available stable funding is at all times equal to or higher than e.g. 125% of its required stable funding as measured in the NSFR.
Approach 5: − ensure that its available stable funding is at all times equal to or higher than EUR X billion; or
− ensure that its available stable funding is at all times equal to or higher than EUR X billion in excess of the minimum requirement in accordance with the NSFR.