SREP liquidity assessment

Competent authorities should determine through the SREP liquidity assessment whether the liquidity and stable funding held by the institution provides appropriate coverage of the risks to liquidity and funding assessed in accordance with Title 8. Competent authorities should also determine through the SREP liquidity assessment whether it is necessary to set specific liquidity requirements to cover risks to liquidity and funding to which an institution is or might be exposed.

Competent authorities should consider the institution’s liquidity buffers, counterbalancing capacity and funding profile, as well as its ILAAP and arrangements, policies, processes and mechanisms for measuring and managing liquidity and funding risk, as a key determinant of the institution’s viability. This determination should be summarised and reflected in a score based on the criteria specified at the end of this title.

The outcomes of the ILAAP, where applicable and relevant, should inform the competent authority’s conclusion on liquidity adequacy.

Competent authorities should conduct the SREP liquidity assessment process using the following steps:

To assess whether the liquidity held by an institution provides appropriate coverage of risks to liquidity and funding, competent authorities should use the following sources of information:

Competent authorities should consider the reliability of the institution’s ILAAP, including metrics for liquidity and funding risk used by the institution.

When assessing the institution’s ILAAP framework – including, where relevant, internal methodologies for the calculation of internal liquidity requirements – competent authorities should assess whether ILAAP calculations are:

For the assessment of the institution’s liquidity adequacy, competent authorities should also combine their assessments of liquidity risk and funding risk. in particular, they should take into account findings regarding:

Competent authorities should translate this overall assessment into a liquidity score, which should reflect the view of competent authorities on the threats to the institution’s viability that may arise from risks to liquidity and funding.

Competent authorities should decide on the necessity of specific supervisory liquidity requirements for the institution based on their supervisory judgement and following dialogue with the institution, taking into account the following:

When competent authorities conclude that specific liquidity requirements are needed to address liquidity and funding concerns, they should decide on the application of quantitative requirements, as covered in this title, and/or on the application of qualitative requirements, as covered in Title 10.

When setting structural, long-term supervisory requirements, competent authorities should consider the need for additional short/medium-term 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 unacceptably, they should consider measures, including setting additional own funds requirements (as covered in Title 7) to compensate for the increased P&L impact if the institution cannot pass the increased costs of funding to its customers, or requesting changes to the funding structure, to mitigate the funding-cost risk.

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:

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:

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:

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

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:

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:

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.

Following the above assessment, competent authorities should form a view on whether existing liquidity resources provide sound coverage of the risks to which the institution is or might be exposed. This view should be reflected in a summary of findings, accompanied by a viability score based on the considerations specified in Table 12.

For the joint decision (where relevant), competent authorities should use the liquidity assessment and score to determine whether the liquidity resources are adequate.

Table 12. Supervisory considerations for assigning a score to liquidity adequacy

Score

1

2

3

Score

4