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EBA Public Hearing Summary: Liquidity Requirements for Currencies Facing Constraints

Core Content

The European Banking Authority (EBA) conducted a public hearing on 19 November 2013 in London, focusing on three key technical standards (ITS) and one regulatory technical standard (RTS) related to liquidity requirements under the Capital Requirements Regulation (CRR). These standards aim to address liquidity constraints for currencies in which the availability of high-quality liquid assets (HQLA) is limited, particularly for institutions operating in the European Economic Area (EEA).

Main Viewpoints

1. EBA's Mandate and Regulatory Context

• The CRR, finalized in June 2013, mandates the EBA to develop technical standards and guidelines to ensure regulatory harmonization across the EU.
• The EBA's tasks include:
  • Developing ITS on currencies with extremely narrow central bank eligibility.
  • Developing ITS on currencies with insufficient availability of liquid assets.
  • Developing RTS on derogations for currencies with liquidity constraints.

2. Timeline for Deliverables

• ITS on narrow central bank eligibility: Deadline 31 March 2014.
• ITS on shortage of liquid assets: Deadline 31 March 2014.
• RTS on derogations and conditions of application: Deadline 31 March 2014.
• Other related deadlines include:
  • Report on Impact on LCR: 31 December 2013
  • Report on definition of HQLA: 31 December 2013
  • RTS on additional collateral outflows: 31 March 2014
  • RTS on intragroup outflows: 01 January 2015
  • Report on NSFR: 31 December 2015

Key Information

ITS on Currencies with Extremely Narrow Central Bank Eligibility

• Mandate: Under Article 416(5) of CRR, the EBA must draft standards identifying currencies where only central government debt or central bank-issued debt is eligible as HQLA.
• Result: Only Bulgarian leva (BGN) was identified as having an extremely narrow definition of central bank eligibility, based on the EBA's data-gathering exercise.
• Variation among EEA countries: The list of eligible currencies varied significantly. For example, the Czech Republic and Iceland had very narrow ranges, while the UK, Denmark, and Sweden had slightly broader ones.

ITS on Currencies with Insufficient Availability of Liquid Assets

• Mandate: Under Article 419(4) of CRR, the EBA must identify currencies where the availability of HQLA is insufficient relative to the demand.
• Methodology:
  • A < D + B is the formula used, where:
    • A = Availability of HQLA.
    • D = Aggregate demand for HQLA (with a multiplier of 1.1 to reflect a target LCR of 110%).
    • B = 25% of the total demand, to maintain market liquidity.
  • Data Collection: Member States provided data on two currencies: Norwegian krone (NOK) and Danish krone (DKK).
• Results:
  • NOK: Availability is 62% of the demand, leading to a 38% shortage (without buffer) or 63% (with buffer).
  • DKK: Availability is 98% of the demand, leading to a 2% shortage (without buffer) or 27% (with buffer).

RTS on Derogations for Currencies with Liquidity Constraints

• Derogation A: An 8% additional haircut is applied to foreign currency HQLA to account for currency risk. This can be reduced for mutually supported currency pegs and increased for non-global currencies.
• Derogation B: Institutions must pay fees to the central bank that offset the higher yield from assets securing credit lines, and may also include a charge based on the amount drawn.
• Conditions:
  • Institutions must aim to reduce their reliance on derogations.
  • Derogations are limited to the estimated shortfall percentage for the relevant currency.
  • A 30-day notification requirement applies before using derogations.
  • Reporting of derogation use is required in the ITS.

Robustness and Updating

• The EBA conducted a sensitivity analysis to evaluate potential deviations from the Basel definition of HQLA and changes in supply or demand.
• Re-evaluation is necessary if there are significant changes in the availability or demand for liquid assets.
• The analysis will be reviewed again after the delegated act from the Commission finalizes the EU definition of HQLA (expected by 30 June 2014).

Feedback and Consultation

• The EBA invited feedback on the three draft technical standards (BTS), particularly on the questions raised in the respective CPs.
• The consultation period was from 22 October to 22 December 2013.

Contact Information

• EBA Public Hearing
• Location: Floor 18, Tower 42, 25 Old Broad Street, London EC2N 1HQ, United Kingdom
• Phone: +44 (0)20 7933 9900
• Fax: +44 (0)20 7382 1771
• Email: info@eba.europa.eu
• Website: www.eba.europa.eu