In its 20 July 2011 CRD IV and CRR proposals, the European Commission introduced liquidity standards as prudential requirements. For a bank, liquidity risks entail its exposure to a credit run due to a huge and unexpected loss of confidence by depositors and borrowers. To avoid such a scenario, unprecedented regulatory standards were set, the Liquidity Coverage Ratio and the Net Stable Funding Ratio.
Updated: January 2017
Liquidity Coverage Ratio (LCR)
ESBG considers a positive measure the revision of the LCR developed in January 2013 by the Basel Committee, i.e. enlarging eligible assets, outflows percentage reduction and the timetable for the phase-in of the standard. Additionally, we firmly support the inclusion within the pool of liquid assets of those assets eligible as a guarantee for central bank liquidity operations and those assets held by the central institution of the Institutional Protection Scheme. Indeed, ESBG supports broadening the definition of HQLA Level 1 and HQLA Level 2 (the recognition of certain assets such as certain securitisation, corporate debt securities and certain equity) and allowing for a larger part of HQLA Level 2 in the LCR. Both market realities and lessons recently learned clearly show that a broader set of assets should be included in the HQLA Level 1 category, to reflect that instruments issued by Member States are not necessarily more liquid than the best private debt instruments.
The LCR is a short term ratio that sets up a stock of free or low risk assets which are liquid or high liquid: easy to sell even in crisis scenarios in 30 days' time.
Net Stable Funding Ratio (NSFR)
believes that the NSFR is an unnecessary ratio that – if finally applied –
would most likely deepen the current lending shortage trends. ESBG remains
concerned about potential imbalances that could lead to deleveraging in the
short term, as well as the treatment of covered bonds, reverse repos, derivatives,
central counterparties, and non-financial deposits. 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
The NSFR is defined as the amount of available stable funding relative to the amount of required stable funding. The ratio should be equal to at least 100% on an ongoing basis. "Available stable funding" is defined as the portion of capital and liabilities expected to be reliable over the time horizon considered by the NSFR, which extends to one year.
On 31 October 2014, the Basel Committee published the final NSFR rules, establishing that the NSFR will stick to the calendar and will be a mandatory requirement for banks as of 2018. These final rules include a few changes with regards to the last NSFR consultative document published in January 2014. These changes toughen, inter alia, the treatment of short-term interbank loans and derivatives. On 22 June 2015 the Basel Committee published the NSFR final disclosure requirements and on 17 December 2015, the EBA published a report in which it recommends the introduction of the NSFR in the EU to ensure stable funding structures.
In November 2016, the Commission submitted a
legislative proposal implementing the NSFR. This was based
on the EBA report and the BCBS's ongoing work on banking supervision.