Liquidity coverage ratio Bookmark has been added
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.
- Upcoming amendments
- Impact on banks
- How can Deloitte help?
- Get in contact with us today
- Related topics
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).
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!
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