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G-20 up close: Liquidity

G-20 up close: Liquidity

Part of WSBI position on effective, efficient financial governance.

>> See the WSBI Intitutional Positions for G20 decision makers (.pdf)


​BRUSSELS, 3 October 2016 – In the recently released WSBI position paper to G20 decision makers, WSBI gives its stance on on effective, efficient financial governance as it relates to liquidity.

WSBI position

In January 2013, the Basel Committee on Banking Supervision (BCBS) published the revision of the Liquidity Coverage Ratio (LCR), which mainly consisted of softening the proposal by enlarging the contingent of eligible assets, lowering the outflow rates and postponing the application of the rule. In the EU context, the LCR has been applicable since 1 October 2015.

WSBI welcomes this less strict approach. It firmly supports the recognition of covered bonds and assetbacked securities (ABS) as high quality liquid assets (HQLA) of the best quality, in particular SME loans-based ABS. This measure would, for example, help to build an ABS market in the European Union (EU) that helps SMEs to fund themselves while easing the refinancing of banks.

WSBI is confident that decision-makers will show the same prudence and broadmindedness when deciding on the calibration of the Net Stable Funding Ratio (NSFR). Similarly, taking an unnecessarily harsh approach should be avoided to since it could harm SMEs and economic growth.

On 31 October 2014, the BCBS published the final NSFR rules. These final rules have included a few changes with regards to the last NSFR consultative document published in January 2014. The BCBS has included changes that will toughen the treatment of short-term interbank loans (banks shall be required to have at least 10% of such lending in stable funding if the asset is secured with a Level 1 HQLA, and 15% if the loan is secured by a Level 2 or lower HQLA), derivatives and assets posted as an initial margin on derivatives contracts. They have also included some room for discretion to regulators who will be allowed to make exemptions if the asset is clearly linked to a particular funding source.

Furthermore, on 22 June 2015, the Basel Committee published the NSFR final disclosure requirements. Banks must publish this disclosure with the same frequency as, and concurrently with, the publication of their financial statements (i.e. typically quarterly or semi-annually), irrespective of whether the financial statements are audited. In parallel with the implementation of the NSFR standard (in fact, the NSFR is expected to stick to the originally foreseen timeline and will be a mandatory requirement for banks as of 2018), banks will be required to comply with them from the date of the first reporting period after 1 January 2018.

WSBI does not see the necessity of this ratio being applied and considers that it would create further liquidity shortages in the financial markets. Moreover, other concerns still remain, such as the potential imbalances that can lead to deleveraging in the short term, as well as the treatment of covered bonds, reverse repos, derivatives, central counterparties, and non-financial deposits. There is currently a vast shortfall of stable funding and the introduction of the NSFR may delay the macroeconomic recovery since banks will try to adapt to anticipate the implementation of the rule. The NSFR will most likely have a negative impact on the way credit institutions structure their refinancing, especially regarding products with long-term horizons, such as mortgage loans.

With regards to Europe, on 17 December 2015 the European Banking Authority published its report on the impact assessment of the NSFR recommending its introduction. The analysis did not find strong statistical evidence of significant negative impacts of the NSFR yet explained that certain EU specificities should be taken into account. The report will inform the work of the European Commission on legislative proposals on NSFR, which the Commission shall submit by 31 December 2016.

WSBI is of the opinion that the NSFR should be calibrated in a way which will not be detrimental to the “boring” banking business which finances the real economy. Furthermore, we underline the importance of finding the right balance between improving the resilience of the banking sector to liquidity shocks and avoiding excessive restrictions on maturity transformations that discourage longterm financing.

Liquidity ratio; Liquidity risk; Liquidity standards; G20; Basel III