Articulation of specific quantitative liquidity requirements
To articulate the specific quantitative liquidity requirements appropriately, 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.
To ensure there is consistency, competent authorities should structure specific quantitative liquidity requirements in such a manner as to deliver broadly consistent prudential outcomes across institutions, bearing in mind that the types of requirements specified 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.
When setting the specific quantitative liquidity requirements and communicating them to the institution, competent authorities should ensure that they are immediately notified by the institution if it does not meet the requirements, or does not expect to meet the requirements in the short term. Competent authorities should ensure that this notification is submitted without undue delay by the institution, 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 institution’s restoration 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 circumstances of the institution; 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 10 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 2021 and until otherwise directed, Bank X is required to:
a. 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.
b. Approach 2 – ensure that its counterbalancing capacity results at all times in a survival period that is greater than or equal to 3 months, measured by the internal liquidity stress test / the maturity ladder / specific metrics developed by the supervisor.
c. 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 under the LCR.
d. 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.
e. 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 under the NSFR.