Benchmarking 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.