Liquidity Risk – Regulatory Update
Damian Harland,
Banking Policy, UK FSA.
Summary
Build up to the Crisis
Regulatory Response: so far…
Finalising International Standards
Impact Study Results
Pre-Implementation Period
Other Regulatory Initiatives
Build up to the crisis
Customer funding gap of major UK banks (a)
Sterling liquid assets relative to total asset holdings of
UK banking sector
Response to the crisis, so far…
Enhanced Policy Requirements:
-
Systems and Controls
Stress Testing, Contingency Planning
“Self-assessment” of Liquidity Risk (ILAA (UK))
Cross-Border Management
Quantitative Liquidity Standards
Enhanced Supervision:
- In-depth Supervisory Reviews
- Data Collection, Peer Analysis & Monitoring
Branches operating in London
EEA or non-EEA
bank
London
Branch
FSA Regulatory perimeter
FSA branch supervision
Premodification
High quality buffer
No branch liquidity standards*
Local systems and controls assessment
No local liquid assets requirement*
No recognition of head office support
less than 3 months
Weekly Branch level reporting
(monthly if B/S <£5bn)
Supervision of branch is delegated
to home supervisor
No local systems and controls
requirements*
Postmodification
FSA monitors infrequent whole-firm
return
* All rules are waived, except for the “overall liquidity adequacy rule”, which is modified to recognise liquidity support from head office
Near-term next steps
Ongoing implementation of domestic liquidity policies:
- Continue roll-out of supervisory reviews
- Develop transparent and consistent methodologies for
idiosyncratic risks
- Identification of thematic risks
- Contingency planning
Finalising International Standards
GHOS endorsed Basel Committee finalising the LCR:
- Ensure liquidity pool can be used in a stress
- Address limited areas of over- and under- calibration
- Study whether the LCR could hinder or conflict with
central bank policies
- Investigate market-based criteria for allocation to Level 1
and Level 2 assets to replace ratings-based approach
Target: “By the end of 2012”
Impact Study – story so far
Basel Committee and EBA have conducted a series of Impact
Studies
• Data quality improving, albeit still areas of inconsistency
• Wide dispersion of results, particularly amongst smaller
banks
• Liquid asset shortfall around 3%-4% of total assets
• Small number of banks impacted by cap on Level 2 assets
or inflows
Impact Studies – story so far
Pre-Implementation period – EBA role
CRD IV will require all institutions to report to the EBA the
LCR components to assess whether it would have a
“material detrimental impact”
Moreover, the EBA will assess the definition of liquid assets
based on market criteria
Further guidelines and technical standards are required by
the Regulation
European Commission will then introduce legislation taking
into account EBA work and international standards
Pre-implementation period – EBA role
To be submitted by 1 January 2013:
•ITS on uniform reporting formats for LCR and NSFR, additional liquidity monitoring metrics and IT
solutions for reporting (art. 403 (3) (a) – (c)),
•ITS listing currencies which meet the requirement of central bank eligibility criteria for liquid assets
(art. 404 (4)),
•ITS on currencies with constraint availability of liquid assets (art. 407 (4)),
•RTS on exceptions for such currencies (art. 407 (5)),
•ITS on retail deposits subject to higher outflows (art. 409 (3)),
•RTS on additional outflows corresponding to collateral needs (art. 411 (3)).
Pre-Implementation period – EBA role
To be submitted by 31 December 2013:
•Report on the impact of the LCR (art. 481 (1)),
•Report on appropriate uniform definitions of high and extremely high liquid assets (art. 481 (2)).
To be submitted by 30 June 2014:
•RTS on outflows for other services and products (art. 408 (3)).
To be submitted by 31 December 2015:
•Report on the impact of the NSFR (art. 481 (3)).
PLUS: A number of BTS in the area of joint-decisions and
liquidity risk management.
Pre-implementation period – Industry role
Contribute effectively to coherent policy-making:
- Incorporating lessons learned
- Evidence-based, grounded in data & analysis
- Highlighting industry best practice
- Capable of consistent implementation
- Submission of good quality data in monitoring period
Other Regulatory Initiatives
Directed at banks:
• Macroprudential Liquidity Tools
• Structural Restrictions (e.g. ring-fencing, “Volcker” Rule)
• Recovery and Resolution Plans
• Asset Encumbrance
Other:
• Shadow Banking
• Solvency II
Macro-prudential Policy
Aim:
To control liquidity-driven balance
sheet expansion and curbing credit
cycles
Correct for potential procyclicality of
microprudential tools
Discourage over-reliance on particular
funding sources
Tools:
Time-varying liquidity buffers,
structural funding measures
Challenges:
Calibration, data availability,
application
“Ring-fencing”
Aim:
To make banks better able to absorb
losses
To make it easier and less costly to
sort out banks that still get into
trouble; and so
To curb incentives for excessive risktaking.
Tools:
Higher prudential requirements and
structural separation
Challenges:
Implementation (c.f. Volcker rule)