Summary 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.