The Implementation of Basel III Liquidity Standards in CRD IV
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The Implementation of Basel III Liquidity Standards in CRD IV The 2011 Forum on Basel III Implementation July 12, 2011, Zurich Stefan W. Schmitz Disclaimer: The opinion of the presenter does not necessarily reflect those of the OeNB or the Eurosystem. [email protected] Structure.

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The implementation of basel iii liquidity standards in crd iv

The Implementation of Basel III Liquidity Standards in CRD IV

The 2011 Forum on Basel III Implementation

July 12, 2011, Zurich

Stefan W. Schmitz

Disclaimer: The opinion of the presenter does not necessarily reflect those of the OeNB or the Eurosystem.

[email protected]


Structure

Structure

  • Liquidity in the CRD IV – Pillar I

  • Harmonised liquidity reporting

  • QIS results

  • Liquidity in the CRD IV – Pillar II

  • Assessment

  • Impact on monetary policy implementation

  • Conclusions


Liquidity in the crd iv pillar i

Liquidity in the CRD IV – Pillar I


Current status

Current status

  • EU liquidity regulation

    • Heterogeneuousquantitative liquidity regulation

    • Heterogeneuous liquidity reporting(COREP)

  • High-level principles for liquidity risk management in pillar II

    • CRD II Annex

  • CEBS Guidelines


Basel iii liquidity standards

Basel III liquidity standards

BCBS International framework for liquidity risk measurement, standards and monitoring, December 2009

  • Objectives

    • Harmonisation of quantitative liquidity regulation

    • Stability of individual institutions under stress

    • Systemic stability under stress

  • Liquidity stress tests

    • Instrumental to achieve more risk sensitive ratios

    • Static minimum stress scenarios

  • Standards

    • Liquidity Coverage Ratio (2015)

    • Net Stable Funding Ratio (2018)


Liquidity coverage ratio lcr

Objective

Liquidity even under very severe liquidity stress over 30 days w/o gov & CB assistence

Minimum requirements

Liquidity Coverage Ratio (LCR)


Lcr net cashflow calibration

LCR: net-cashflow calibration

(Summary)


Net stable funding ratio nsfr

Objective

Reduce maturity mismatch between funding and assets

Assets > 1 y funded by liabilities > 1y

Net Stable Funding Ratio (NSFR)

(Summary)


Challenges i

Challenges (I)


Challenges ii

Challenges (II)


Challenges iii

Challenges (III)


Challenges iv

Challenges (IV)


Harmonised liquidity reporting

Harmonised liquidity reporting


Maturity mismatch template

Maturity mismatch template


Challenges

Challenges

  • WGL plans to develop a similar template

    • Focus on LCR

    • EBA template focuses on liquidity monitoring

  • Proportionality

    • Majority of banks should report monthly

    • Largest banks weekly

    • Rest quarterly

    • Similar waiver as for LCR can apply for liquidity sub-groups


Qis results

QIS results


Qis results1

QIS results

-1,730 bn €

-2,890 bn €

Source: BIS (2011).


Main drivers lcr outflows

Main drivers LCR outflows

Source: BIS (2011).


Main drivers lcr inflows

Main drivers LCR inflows

Source: BIS (2011).


Composition of liquid assets

Composition of liquid assets

Source: BIS (2011), Chart 6.


Challenges1

Challenges

  • Potential behaviouralreactions

    • Reductionofrefinancing via unsecuredinterbankdeposits

    • Terming out andstaggeringoffunding via unsecuredinterbankdeposits

    • Promotingstabledeposits

    • Substitution of liquid for illiquid assets & within liquid assetstowardslowerhair-cuts

    • Off-balance-sheet: Reductionofundrawnliquidity/creditlinesunlessfairlypriced

    • Improvementofdataquality

       Practicalchallenge in termsofcosts/economicimpactlow


Liquidity in the crd iv pillar ii

Liquidity in the CRD IV – Pillar II


Pillar ii crd ii annex v

Pillar II – CRD II Annex V

Qualitative liquidityregulation


Relevant cebs guidelines

Relevant CEBS Guidelines

  • CEBS’S Technical Advise on Liquidity Risk Management (2nd part)

  • Guideline on Liquidity Buffers & Survival Periods

  • High level principles for risk management

  • Guidelines on Stress Testing CEBS

  • Guidelines on Liquidity Cost Benefit Allocation


Challenges2

Challenges

  • Coherence across directives/regulations/guidelines

  • Coherent implementation/interpretation/application across EU

  • Principles based detailed guidance

  • Supervisory authorities often prefer „box-ticking“ approach

  • Expertise & judgement rule of law/liability of authorities


Assessment

Assessment


Assessment i

Assessment (I)

  • International harmonisation of standards & reporting (EU)

  • Binding quantitative liquidity standards

    • Internalise negative externalities

      • But LCR/NSFR not binding for most banks

    • Maintain confidence under stress

  • Risk sensitive across balance sheet structures

    • Across banks/time  improvement wrt to simple stock approaches

    • But not risk sensitive with respect to market/banking environment

      • More refined stock approach with static run-off rates

    • Definition of components product specific

      • Liquidity risk characteristics/product innovation?


Assessment ii

Assessment (II)

  • Stress testingstocksproblematic

    • Insufficientpictureof li-situation

    • Preferrablegrosscash-flows & counterbalancingcapacity

  • Approach to liquid assetsinconsistentwith stress testapproach

    • Unintendedconsequences

      • Feedback on marketliquiditythroughfrozenportfolios/firesales?

      • Increasingreliance on CRAs  cliff-effects  feedback on markets

  • Scopeofapplication


Assessment iii

Assessment (III)

  • Consistencybetween CRD IV and CEBS Guidelines?

    • Distinctionpillar I & pillar II

  • Potential impact

    • Ratioswatered down substantially after QIS – still binding?

    • Competitionfordepositsintensivies – depositgrowth/long-term debtissuanceconstrainloangrowth

      • Challengesforemerging, fast growingeconomies

    • Interbank market – liquidityinsurance, structural li-deficit & monetarypolicyimplementation


Impact on monetary policy implementation

Impact on monetary policy implementation


Impact on monetary policy i

Arbitrage via CB

Impact ofcrisis

Unsecured interbank market

LCR

Structural liquidity deficit

Main target rate

Impact on monetary policy (I)


Impact on monetary policy ii

Impact on monetary policy (II)


Impact on monetary policy iii

Impact on monetary policy (III)


Challenges for monetary policy

Challenges for monetary policy

Dynamic impact

Increasing, /volatile structuralliquiditydeficit

Arbitrage betweensecured & unsecuredimpaired

LCR binding

MRR slack

Reform of framework

Reduce MRR

Narrow setofcollateral

Re-establish arbitrage relationship

Target

Eurepo

Channel approach

More volatile structuralliquiditydeficit

Narrow

corridor


Conclusions

Conclusions


Conclusions1

Conclusions

Clear improvement

Quantitative li-regulation based on a functionalapproach

International harmonisation

Harmonisationofmonitoring in the EU

Improved qualitative regulation

Main challenges

Consistency across regulatory approaches

Level of application

Definition of liquid assets

Impact on monetarypolicy


Background material

Background material

BCBS (2008) Principles for Sound Liquidity Risk Management and Supervision, Basel

BCBS (2009) International framework for liquidity risk measurement, standards and monitoring, Basel

CEBS (2008) CEBS’S Technical Advise on Liquidity Risk Management (2nd part), London

CEBS (2009) Guideline on Liquidity Buffers & Survival Periods, London

CEBS (2010a) High level principles for risk management, London

CEBS (2010b) Guidelines on Stress Testing (GL32), London

ECB (2008) Report on EU banks liquidity stress tests and contingency funding plans, Frankfurt

Schmitz, S.W., A. Ittner (2007) Why central banks should look at liquidity risk, Quarterly Journal Central Banking Vol. XVII No. 4, 32-40

Schmitz, S. W. (2011) The Impact of the Basel III Liquidity Standards on the Implementation of Monetary Policy, mimeo OeNB, Vienna

Liquidity Risk Management Workshop, RiskMinds 2010


Appendix

Appendix


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