The EBA Updates Report On The Monitoring Of The Liquidity Coverage Ratio And Net Stable Funding Ratio In The EU

The European Banking Authority (EBA) today published an updated Report on the monitoring of the liquidity coverage ratio (LCR) and the net stable founding ration (NSFR) in the EU. This update is necessary in light of the banking turmoil experienced in March 2023, which highlighted the need for enhanced supervision of various liquidity aspects resulting from the change in the interest rate environment and related trends in deposit behaviour and concentrations.

In particular, this Report provides further clarification for the recognition in the LCR calculation of LCR inflows from open reverse repos without a maturity date within 30 days, following Q&A 2024_7053 (published on 3 May 2024). It builds on two approaches, the first of which builds on the occurrence of a trigger event to terminate the transaction, and the second one on historical experience. The Report also considers how recently, in some banks, operational deposits increased while excess operational deposits decreased, and how the interest rate environment changed. In this context, the Report supplements the guidance provided in the EBA’s 2019 Report on identifying operational deposits, the characteristics of the operational deposit trade cycle, and the material penalty for retail term deposits.

Lastly, an Addendum to the EBA’s 2023 Report on interdependent assets and liabilities in the NSFR is also included. It clarifies regulatory expectations regarding indirect client clearing activities, where affiliated institutions rather than an IPS structure – which is already covered in the 2023 Report – are involved.

Legal basis, background, and next steps

The LCR is applicable in the EU since 1 October 2015, and its full implementation at a minimum of 100% became effective in January 2018. The NSFR is applicable in the EU at a minimum of 100% since 28 June 2021.

Moreover, article 428f(3) of the CRR mandates the EBA to monitor the assets and liabilities treated as interdependent and to determine whether the criteria required in paragraph 1 of the same Article are met. The EBA shall report to the Commission on the results of that monitoring and shall advise the Commission on whether an amendment to the conditions set out in paragraph 1 or an amendment to the list of products and services in paragraph 2 would be necessary. Derivative client clearing activities are mentioned under Article 428f(2)(d) of the CRR.

The EBA published Reports on the monitoring of LCR and NSFR in EU in 2019, 2021 and 2023, and a 2023 report on interdependent assets and liabilities in the NSFR.

The EBA will continue monitoring some specific aspects of the LCR and NSFR due to current circumstances and interest rate environment to set out its observations and provide further guidance, where necessary.

The EBA will also assess further the need to amend/complement the existing regulatory reporting on liquidity requirements.