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JOURNAL OF INTERDISCIPLINARY RESEARCH

3 Harmonisation of liquidity risk regulations at the
European level

The liquidity risk had not been in the centre of attention until the
global financial crisis materialized in 2008. Some studies

suggested different reasons for the late harmonization of
liquidity regulations, such as the lack of supervisory momentum,
or the view that capital addresses liquidity risks. The reason
might be as well that the liquidity risk management does not
usually pose problems under normal circumstances, when
liquidity is abundant and relatively cheap. The recent financial
crisis gave supervisory momentum and made the liquidity
regulations for banks more pronounced and uniform.

A transposition of the Basel principles into the European Union
(EU) legal framework takes place in the form of directives,
resolutions and technical standards or guidelines. While
implementing these principles, the European legislators take into
account the EU and national specificities. There are currently in
force two main legislative acts, which refer to liquidity risk
management by banks (investment firms as well, although the
scope of this paper is limited to banks only).

The directive 2013/36/EU of the European Parliament and of the
Council of 26 June 2013 (CRD IV)

requires banks to develop

robust policies, strategies, processes and systems for the
identification, measurement, management and monitoring of
liquidity risk over a set of different time horizons, including
intraday. These policies, strategies, processes and systems
should be proportionate to complexity, risk profile, scope of
operations, risk tolerance and a bank’s importance in each
Member State, in which it conducts business. They should also
take into account core business lines, currencies, branches and
legal entities. It is equally important that banks develop
methodologies for the identification, measurement, management
and monitoring of funding positions, which should include

the

current and projected material cash-flows arising from assets,
liabilities, off-balance-sheet items and the possible impact of
reputational risk. In addition, the management body of each bank
is assigned with the responsibility to set appropriate liquidity
risk tolerance, which should be communicated to all relevant
business lines in order to increase the awareness of the liquidity
risk incurred in operations, which they carry out. What is more,
banks should be able to actively manage available collateral, i.e.
to distinguish between pledged and unencumbered assets, as
well as to monitor a physical location of the assets and assess the
potential to use them in emergency situations. Article 86 of the
directive 2013/36/EU also requires banks to include allocation
mechanism of liquidity costs, benefits and risks. Moreover,
banks are obliged to maintain a buffer of liquid assets, which
should enable them to withstand a wide range of stress events.
Other risk mitigation tools should include a system of limits,
well diversified funding structure and access to funding sources,
all of which need to be reviewed regularly. Alternative scenario
analyses are critical for decisions underlying the composition of
liquidity risk mitigants and funding positions of banks. They
need to be conducted at least on an annual basis and address, in
particular, off-balance sheet items and other contingent
liabilities, including those of Securitisation Special Purpose
Entities or other special purpose entities, in relation to which the
bank is expected to deliver material liquidity support either
because it acts as a sponsor or people believe it is otherwise
related. The analyses should be comprehensive enough to
capture the institution-specific, market-wide and combined
scenarios of different lengths and severity. The outcomes of the
alternative scenario analyses should form a basis for contingency
planning. Last but not least, banks shall assess how
developments such as product design and volumes, risk
management, funding policies and funding concentrations affect
their liquidity risk profiles.

C. Bonner, P. Hilbers, Global liquidity regulation - Why did it take so long?, DNB

Working Paper, Working Paper No. 455, January 2015, p. 8.

Directive 2013/36/EU of the European Parliament and of the Council of 26 June

2013 on access to the activity of credit institutions and the prudential supervision of
credit institutions and investment firms, amending Directive 2002/87/EC and repealing
Directives 2006/48/EC and 2006/49/EC, OJ L 176/338, 26.7.2013.

The Regulation (EU) No 575/2013 (the CRR)

applies to banks

directly in the EU Member States. It imposes two quantitative
liquidity requirements, namely the LCR and the NSFR, as in the
Basel accord.

The short term liquidity requirement has already become binding
since 1 October 2015

and its minimum required level is 60%

(the minimum requirement will be 70% in 2016, 80% in 2017,
and 100% in 2018). The European Commission (the EC) may
alter the phase-in periods and decide to postpone a full
introduction of the LCR until 2019

. It is important to note also

that competent authorities have been given a mandate to set the
minimum liquidity coverage requirement at a higher level of up
to 100% before 2018

. What is more, Member States are

allowed to maintain or introduce new binding short term
liquidity standards until the liquidity coverage requirement is
fully introduced in the Union

By the end of 2015, the European Banking Authority (the EBA)
is expected to submit a report to the European Commission (the
EC) on whether and how it would appropriate to introduce the
stable funding requirement. While making this assessment, the
EBA should take into account possible consequences for the
economy, business and risk profiles of institutions established in
the EU, financial markets and bank lending, with a particular
focus on lending to certain business sectors

. Within the same

timeframe, the EBA should also, after consulting the European
Systemic Risk Board (the ESRB), report on methodologies for
determining the weights applicable to assets, liabilities and off-
balance sheet items in order to assess the amounts of required
and available stable funding

. Similarly to the LCR, Member

States are allowed to maintain or introduce new stable funding
requirements until the NSFR is specified and introduced in the
Union

It should be noted that the provisions referring to the liquidity
requirements as set out in the CRR serve solely for the purpose
of specifying reporting obligations until detailed delegated acts
become introduced

. With regard to the LCR, the delegated act

specifying the requirement came into force on 10 October 2014
and became binding from 1 October 2015. The detailed
delegated act concerning the NSFR is still pending. The EC shall
adopt this act, if it considers it appropriate, by 31 December
2016

In order to complement the delegated act concerning the
liquidity coverage requirement and ensure a level playing field,
the EC should adopt several detailed technical standards. So far,
the EC has adopted the ITS on currencies with an extremely
narrow definition of central bank eligibility

, according to

which the condition for liquid assets to be eligible collateral for
standard liquidity operations of a central bank in a Member State
or the central bank of a third country should be waived for liquid
assets held to meet liquidity outflows denominated in Bulgarian
levs (in Bulgaria, the central bank does not extend liquidity to

Regulation (EU) No 575/2013 of the European Parliament and of the Council of

26 June 2013 on prudential requirements for credit institutions and investment firms
and amending Regulation (EU) No 648/2012, OJ L 176, 27.6.2013.

Commission Delegated Regulation (EU) 2015/61 of 10 October 2014 to supplement

Regulation (EU) No 575/2013 of the European Parliament and the Council with regard
to liquidity coverage requirement for Credit Institutions, OJ L 11, 17.1.2015.

Article 461(2) of the CRR. While assessing the necessity of deferral the

Commission shall take into account the report and assessment, which is to be prepared
by the European Banking Authority by 30 June 2016.

Article 416(5) of the CRR.

Ibidem.

Article 510(1) of the CRR.

Article 510(2) of the CRR.

See Article 413(3) of the CRR.

See Articles 412(4) and 413(2) of the CRR. A more detailed assessment and

comparison between the requirement specified under the delegated act and the Basel
standard can be found in: K. Patora, Liquidity Coverage Requirement under the
Delegated Regulation of the European Commission and Basel III Rules – a
Comparative Study, „Bezpieczny Bank/Safe Bank” Nr 2(59) 2015, p. 25-46.

Article 510(3) of the CRR.

Commission Implementing Regulation (EU) 2015/233 of 13 February 2015 laying

down implementing technical standards with regard to currencies in which there is an
extremely narrow definition of central bank eligibility pursuant to Regulation (EU) No
575/2013 of the European Parliament and of the Council, OJ L 39, 14.2.2015.

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