AD ALTA
JOURNAL OF INTERDISCIPLINARY RESEARCH
HARMONISATION OF BANK LIQUIDITY RISK REGULATIONS. A STATE OF PLAY
a
KAROLINA PATORA
University of Lodz, Faculty of Economics and Sociology,
Institute of Finance, Department of Banking, 39 Rewolucji 1905
Street, Łódź, Poland
email:
a
karolina.patora@uni.lodz.pl
This article is an output from the research project titled Liquidity risk management in
the commercial banking sector in the light of dominant share of foreign capital,
financed by the National Science Centre, decision number DEC-
2013/09/N/HS4/03815
Abstract: This article deals with an issue of bank liquidity risk regulations. The legal
framework for banks concerning the liquidity risk management has been evolving
since 2008, when the global financial crisis hit and revealed plenty of unintended
consequences, including system-wide ones. Since then, there have been global as well
as European initiatives undertaken to address the liquidity risk management
deficiencies. The European regulatory framework for liquidity risk management by
banks is still evolving – many of these regulations have not been introduced yet,
whereas the existing provisions are mainly transitional. The article describes and
analyses the regulatory initiatives concerning the liquidity risk management both at the
global and European level, and it draws conclusions with reference to the issue of the
liquidity risk harmonisation within the European Union.
Keywords: liquidity risk regulations, liquidity risk management, harmonisation of
regulations.
1 Introduction
Harmonization of liquidity risk regulations is a new concept,
which has evolved on the grounds of the recent financial crisis.
European regulations concerning the liquidity risk management
draw from the relevant Basel standards, which constitute a
globally recognized framework for internationally active banks.
The liquidity regulations were introduced in the European Union
(EU) throughout the single rulebook, which means that all banks
must comply with them.
The single rulebook was established in the EU with the aim to
provide a set of harmonised prudential regulations for credit
institutions and investment firms in order to ensure a uniform
application of the Basel rules in all member states and finalise
the creation of the single financial market within the EU. It was
also expected that the single rulebook would be helpful in
minimising the divergences in national rules and regulations,
leading to a more resilient, transparent and efficient banking
sector.
The purpose of this paper is to assess the current level of
harmonisation of the liquidity risk regulations and draw
conclusions from its introduction for banks and supervisory
authorities. The article briefly describes the Basel standards
regarding the liquidity risk management by banks. Secondly, it
explains the way the liquidity risk regulations were transposed to
the EU legal framework and gives an overview of the remaining
work. Main conclusions are presented in the summary.
2 Harmonisation of liquidity risk regulations at the global
level
In 2008, as a global financial crisis emerged, it turned out that
the liquidity risk management practices of banks were largely
deficient. Prior to the crisis, liquidity was readily accessible and
relatively cheap. However, under stressed conditions it occurred
that banks lacked sufficiently high quality liquid assets, they did
not use adequate stress tests, neither had robust liquidity
contingency plans in place. What is more, a considerable loss of
trust between banks made it even more difficult to raise funding.
Hence, in many cases, central bank liquidity assistance or even
public support were needed. In response, the BCBS published a
framework for liquidity risk management in 2008
1
in order to
address the lapses identified in basic principles of liquidity risk
1
BCBS, Principles for sound liquidity risk management and supervision, Bank for
International Settlements, September 2008.
management
2
. The framework highlighted the importance of
maintaining a buffer of unencumbered, highly liquid assets,
which would enable banks to withstand a range of stress events
3
.
It referred also to liquidity risk governance, including defining
clear responsibilities of senior management, setting an adequate
liquidity risk tolerance, and incorporating liquidity cost in the
internal transfer pricing systems (LTP – liquidity transfer
pricing)
4
. The BCBS standard shed light on liquidity risk
identification, measurement, monitoring and control systems.
Banks should actively monitor and control liquidity risk
positions, available collateral and funding needs within and
across legal entities, business lines and currencies. Banks should
also diversify tenor and sources of funding and maintain
presence in the markets where they can regularly sell assets and
obtain funds. Intraday liquidity management is equally important
for a sound liquidity risk management
5
, whereas public
disclosure strengthens banks’ resilience to stress.
In order to complement the liquidity risk management
framework, the BCBS introduced two quantitative liquidity
standards, namely a liquidity coverage ratio (LCR)
6
, which was
revised soon after its publication
7
, and a net stable funding ratio
(NSFR)
8
. In addition, the BCBS assisted supervisors in
determining of how to assign liquid assets to a proper category
of high quality liquid assets, based on certain assets
characteristics, market structure characteristics and market
liquidity indicators
9
.
The LCR requires banks to maintain a buffer of high quality
liquid assets in order to ensure that banks withstand a liquidity
crisis lasting for 30 calendar days. A size of liquidity buffer
should be adequate, taking into account a banks’ net liquidity
position (i.e. liquidity inflows over a 30-day horizon less
liquidity outflows over a 30-day horizon, both under the
assumption of idiosyncratic, systemic-wide, and combined stress
scenarios)
10
. On the other hand, the NSFR aims at improving a
structural, long term liquidity position of banks by requiring
them to extend stable sources of funding. Available stable
funding (ASF) should be commensurate with the amount of
assets requiring stable funding (RSF)
11
.
The BCBS also requires banks to disclose quantitative and
qualitative information about the ratios – LCR
12
and NSFR
13
.
The disclosure requirements are expected to improve banks’
transparency, enhance market discipline and reduce uncertainty
in the markets from the date of first reporting period relevant for
each regulatory ratio.
2
The Basel principles of 2008 were not entirely new. In 1992 Basel Committee on
Banking Supervision (BCBS) issued a first set of sound liquidity risk management
practices for banks, which constituted a model approach in the early 90’s (see: BCBS,
A Framework for Measuring and Managing Liquidity, Basel, September 1992). In
2000 the BCBS published a new standard regarding liquidity risk management for
banks: BCBS, Sound Practices for Managing Liquidity in Banking Organisations,
Basel, February 2000.
3
More information on liquidity stress testing can be found: BCBS, Liquidity stress
testing: a survey of theory, empirics and current industry and supervisory practices,
Working Paper No 24, Bank for International Settlements, October 2013; BCBS,
Literature review of factors relating to liquidity stress – extended version, Bank for
International Settlements, Working Paper No 25, Bank for International Settlements,
October 2013.
4
The principles were discussed more thoroughly in: J. Grant, Liquidity transfer
pricing: a guide to better practice, Occasional Paper, no. 10, Financial Stability
Institute, Bank for International Settlements, December 2011.
5
See more: BCBS, Monitoring tools for intraday liquidity management, Bank for
International Settlements, April 2013.
6
BCBS, Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools,
Bank for International Settlements, January 2013.
7
BCBS, Revisions to Basel III: The Liquidity Coverage Ratio and liquidity risk
monitoring tools, Annex, Bank for International Settlements, January 2013.
8
BCBS, Basel III: the net stable funding ratio, Bank for International Settlements,
October 2014.
9
BCBS, Guidance for Supervisors on Market-Based Indicators of Liquidity, Bank for
International Settlements, January 2014.
10
The LCR came into force in January 2015, while the minimum requirement was set
at 60% with a view to be further increased by 10 p.p. per year to reach 100% in 2019.
11
The NSFR shall become a minimum standard by 1 January 2018.
12
BCBS, Liquidity coverage ratio disclosure standards, Bank for International
Settlements, January 2014 (rev. March 2014).
13
BCBS, Net Stable Funding Ratio disclosure standards, Bank for International
Settlements, June 2015.
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