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EBF Comments on CEBS' Technical Advice on Liquidity Risk Management Summary

Core Content

The European Banking Federation (EBF) provides detailed comments on the CEBS (Committee of European Banking Supervisors) technical advice on liquidity risk management, emphasizing the need for updated supervisory practices that align with current industry standards and address the limitations of previous approaches.

Main Points and Key Information

1. General Observations on Supervisory Practices

• Outdated Practices: EBF notes that liquidity risk management supervisory practices were already considered obsolete before the 2007-2008 financial crisis. These practices were overly focused on quantitative requirements and neglected the importance of a group-wide approach for cross-border banks.
• Reconsideration Needed: The financial turmoil highlighted the need for banks to fundamentally re-evaluate their liquidity risk management strategies in light of an adverse liquidity environment.
• Convergence Expectation: EBF appreciates the CEBS document for addressing relevant issues and aligning with industry thinking. It hopes the document will help achieve convergence in supervisory approaches across Europe.

2. Principle of Proportionality

• Flexibility Required: EBF supports the CEBS' emphasis on proportionality as a guiding principle, which allows for flexibility in applying recommendations.
• Avoid Overly Prescriptive Interpretations: Supervisors should not interpret recommendations in a rigid manner, and open dialogue between firms and supervisors is essential when assessing individual circumstances.

3. Internal Methodologies and Supervisory Requirements

• Internal Methodologies Welcome: EBF welcomes the CEBS' openness to internal methodologies as a substitute for quantitative supervisory requirements, which is a more flexible approach compared to the Basel Committee.
• Promote Convergence: This flexibility supports the convergence of internal risk management and supervisory requirements, enhancing efficiency and consistency.

4. Concept of Materiality

• Helpful Reference: The CEBS document's reference to materiality is considered extremely useful, as it helps supervisors identify the most relevant aspects of liquidity risk for assessment.

Detailed Comments on the CEBS Paper

1. Liquidity Cost Allocation

• Internal Cost/Benefit Allocation: EBF supports the recommendation for institutions to have an internal liquidity cost/benefit allocation system to ensure appropriate incentives are assigned based on risk.
• Transfer Pricing as One Tool: While internal transfer pricing is mentioned, EBF notes that it is only one of several methods to incorporate liquidity cost.

2. Intraday Liquidity Management

• Recommendation 11: The recommendation to manage intraday liquidity on a gross basis is understood to mean that banks should be aware of risks and monitor them closely, rather than summing all outflows.
• Collateral Availability: The document implicitly acknowledges that not all participants have sufficient collateral, and that payment systems have safeguards in place.

3. Liquidity Disclosures

• Importance of Transparency: EBF agrees with the emphasis on appropriate disclosures of liquidity positions.
• Sensitivity of Information: However, they highlight that disclosing detailed quantitative information is a sensitive issue and could lead to misunderstandings.
• Stakeholder Appropriateness: EBF suggests that the wording of Recommendation 18 should reflect the need for discretion in the nature, depth, and frequency of disclosures to avoid reducing flexibility during stressed conditions.

4. Supervisory Information Requirements

• Recommendation 28: EBF agrees that supervisors should have access to precise and timely information to assess liquidity risk and evaluate risk management robustness.
• Common Reporting Requirements: They support the idea of developing a minimum set of common reporting requirements for all credit institutions, as this would streamline the process and ensure consistency.

5. Cross-Border Banking Coordination

• Recommendation 29: EBF welcomes the coordination of supervisory efforts for cross-border banking groups.
• Group-Level Management: They stress that the coordination should go beyond understanding the group's liquidity risk profile and should focus on achieving a common understanding of how liquidity is managed at the group level to avoid contradictory requirements and duplication of work.

6. IT Systems Review

• Recommendation 5: EBF suggests that the wording of this recommendation should be revised to focus on reviewing IT processes that support liquidity risk management, rather than just IT systems in general.

Conclusion

The EBF appreciates the CEBS' efforts to modernize liquidity risk management practices and align them with industry needs. They emphasize the importance of flexibility, proportionality, and convergence in supervisory approaches, particularly for cross-border banks. EBF also highlights the need for careful wording in recommendations to ensure they are both effective and appropriate for different contexts.