Determination of specific quantitative liquidity requirements
Competent authorities should develop and apply supervisory liquidity benchmarks as quantitative tools to support their assessment of whether the liquidity held by the institution provides sound coverage of risks to liquidity and funding. 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.
When developing supervisory liquidity benchmarks, competent authorities should take into account the following criteria:
benchmarks should be prudent, consistent and transparent;
benchmarks should be developed using the supervisory assessment of risks to liquidity and funding and the supervisory liquidity stress tests; supervisory liquidity stress testing should be a core part of the benchmark;
benchmarks should provide comparable outcomes and calculations so that quantifications of liquidity requirements for institutions with similar business models and risk profiles can be compared; and
benchmarks should help supervisors to specify the appropriate level of liquidity for an institution.
Given the variety of different business models operated by institutions, the outcome of the supervisory benchmarks may not be appropriate in every instance for every institution. Competent authorities should address this by using the most appropriate benchmark where alternatives are available, and/or by applying judgement to the outcome of the benchmark to account for business-model-specific considerations.
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.
When competent authorities take supervisory benchmarks into consideration for the determination of specific liquidity requirements, as part of the dialogue, they should explain to the institution the rationale and general underlying principles behind the benchmarks.
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:
comparative analysis, under stressed conditions, of net cash outflows and eligible liquid assets over a set of time horizons: up to 1 month (including overnight), from 1 month to 3 months and from 3 months to 1 year; for this purpose, competent authorities should project net outflows (gross outflows and inflows) and counterbalancing 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;
based on the assessment of the stressed maturity ladder, estimation of the survival period of the institution;
determination of the desired/supervisory minimum survival period, taking into account the institution’s risk profile and market and macroeconomic conditions; and
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.
A key input to the competent authority’s benchmarks for the quantification of specific quantitative liquidity requirements will be the data collected through the supervisory reporting under Article 415 of Regulation (EU) No 575/2013 on liquidity and on stable funding on an individual and consolidated basis and on additional liquidity monitoring metrics. The design of benchmarks will be influenced by the content of this reporting and the implementation of benchmarks will depend on when the reports are available.
Below are some examples of the possible approaches:
Example 1: institution with an initial liquidity buffer of EUR 1 200 mln Cumulative inflows and cumulative outflows estimated under stressed conditions are projected through a time horizon of 5 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 4.5 months, which is longer than the minimum survival period set by supervisors (in this example, 3 months):
Table 11. Illustrative example of benchmark for liquidity quantification
Time horizon in cumulative cumulative cumulative net net liquidity position (buffer - Liquidity available months outflows inflows outflows cumulative net outflows) at day 0 1,200 511 405 106 1,094 598 465 133 1,067 659 531 128 1,072 1 787 563 224 976 841 642 199 1,001 933 693 240 960 1,037 731 306 894 1,084 788 295 905 1,230 833 397 803 2 1,311 875 435 765 1,433 875 558 642 1,440 876 564 636 1,465 882 583 617 1,471 889 582 618 1,485 891 594 606 3 1,485 911 574 626 1,492 916 576 624 1,493 916 577 623 1,581 918 663 537 1,618 945 673 527 1,666 956 710 490 4 1,719 993 726 474 1,885 1,030 856 344 1,965 1,065 900 300 2,078 1,099 980 220 2,192 1,131 1,061 139 Survival period 2,415 1,163 1,252 -52 5 2,496 1,194 1,302 -102 2,669 1,224 1,445 -245 2,764 1,253 1,511 -311
Figure 6. Illustrative example of setting specific quantitative liquidity requirement b. Example 2: the supervisory minimum survival period is set at 3 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 7. Illustrative example of setting specific quantitative liquidity requirements