Liquidity coverage ratio | Regulatory Risk | Deloitte Netherlands


Liquidity coverage ratio

The impact of the new amendments in 2020

Changes to the liquidity coverage ratio reporting put pressure on bank’s processes, people and technology. Find out in this blog about the LRC and see what will change in the coming year.

As a response to the financial crisis in 2007, the European Commission implemented the Liquidity Coverage Ratio Delegated Act (LCR DA) in October 2015. As credit institutions focused on adequate capital levels, there was less focus on liquidity management and liquidity demand. This became apparent during the liquidity phase of the financial crisis, where various credit institutions were unable to withdraw short-term funds in the money market leading to severe liquidity stress and ultimately bankruptcy.

This led to the enforcement of banks to hold enough High Quality Liquid Assets (HQLA) to be able to cover the net liquidity outflows for the next 30 calendar days, by selling these HQLA in severe stress situations. These requirements are translated by the European Commission to the LCR DA, supplementing the Capital Requirements Regulation (CRR).

Upcoming amendments

In April 2020, amendments to the current LCR DA will enter into force in order to improve alignment with international standards and facilitate a more efficient liquidity management by credit institutions.

The following amendments will be implemented in April 2020:

  • Possible waivers for mandatory minimum issue size of liquid assets for subsidiaries in third countries to include these assets in the consolidated liquidity buffer.
  • Funding from central banks in third countries will be recognized as liquid assets.
  • STS (Simple, Transparent, Simple) conditions are introduced as additional criteria in order to determine whether securitisations can be recognized as eligible level 2B liquid assets.
  • Trades with the ECB and central banks in member States are expected to roll over in time of stress therefore the liquidity buffer will be calculated with the inclusion of trades with the ECB and central banks in Member states that involve liquid assets.

What is the impact on banks

On overall this will lead to a positive change for the LCR in banks as requirements on liquid assets will be softened, resulting in an enhanced liquidity buffer. For banks that are heavily involved in securitisations, such as mortgage banks, the additional STS conditions may lead to a lower liquidity buffer. However, as Level 2B assets are restricted to a maximum of 15% of the liquidity buffer, the impact will not be significant for the liquidity buffer as a whole.

How can Deloitte help?

  • Support with the assessment of the impact on credit institutions given the LCR amendments.
  • Support with setting-up and implementing a liquidity framework that is in line with the new requirements including governance, policy, reporting and other processes.
  • Support with the implementation of Daily LCR tooling and reporting
  • Support with liquidity stress tests

Questions? Get in touch with us today!

The Center of Excellence for Regulatory Reporting (CoE) is a virtual team centralising Deloitte’s Regulatory Reporting knowledge and helping clients to do responsible business by helping them with their regulatory reporting. In order to effectively support our banking clients in this complex regulatory environment, the CoE is founded to (i) stay on top of new developments in the field of regulatory reporting to support timely and appropriate data-driven-reporting solutions at financial institutions, (ii) support financial institutions by leveraging expert view of our international network on ad hoc queries regarding their regulatory reporting data and processes; and (iii) have teaming of professionals to combine expert knowledge in the field of regulatory reporting with strong data and implementation skills to ensure fit-for-purpose teams.

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