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CEBS Guidelines on Liquidity Buffers & Survival Periods Summary

Core Content

These guidelines, issued by the Committee of European Banking Supervisors (CEBS) on 9 December 2009, focus on the short-term liquidity buffers and survival periods for credit institutions. They aim to enhance liquidity risk management by ensuring that banks can withstand liquidity stress for at least one month without altering their business models. The guidelines are a follow-up to CEBS's September 2008 Recommendations on Liquidity Risk Management, particularly Recommendation 16.

Main Views

• Liquidity risk management involves a range of measures, including stress-test-based liquidity buffers, funding limits, and contingency planning.
• The guidelines are principle-based, emphasizing proportionality and tailored approaches for each institution.
• Liquidity buffers are defined as the short end of the counterbalancing capacity, representing the liquidity available to meet urgent needs during stress.
• The survival period is a critical time frame (at least one month) during which the buffer must ensure the institution's continued operation.
• A shorter time horizon (at least one week) should also be considered within the survival period to reflect the need for higher confidence in liquidity generation.

Key Information

1. Definition of Liquidity Buffer and Survival Period

• A liquidity buffer is the short-term liquidity available to cover additional needs during stress.
• A survival period is the time during which an institution can operate without generating additional funds.
• The buffer is part of a broader counterbalancing capacity, which includes both short and long-term liquidity strategies.

2. Assumptions Driving the Size of the Buffer

• Three types of stress scenarios should be considered: idiosyncratic, market-specific, and a combination of the two.
  • Idiosyncratic stress involves a loss of market confidence, leading to no rollover of unsecured wholesale funding and some retail deposit outflows.
  • Market-specific stress involves a decline in asset liquidity and deterioration in funding market conditions.
• The time horizon should be divided into two phases:
  • A short acute phase (up to one or two weeks).
  • A longer persistent phase (up to one or two months).
• The buffer size is determined based on the assumed liquidity strains and the severity of the stress scenarios.

3. Composition of the Buffer

• The buffer should be composed of cash and core assets that are both central bank eligible and highly liquid in private markets.
• Eligible cash includes the monetary base as defined by central banks, excluding cash held in ATMs or other operational uses.
• Central bank facilities vary by jurisdiction, with voluntary reserve systems allowing all reserves to be included in the buffer, while compulsory reserves require consideration of the time horizon.
• For the shorter time horizon (at least one week), only very liquid assets such as overnight cash holdings should be included.
• For the longer time horizon (at least one month), a broader set of liquid assets may be acceptable, provided the bank can demonstrate the ability to generate liquidity from them under stress.

4. Additional Considerations

• Banks should avoid large concentrations in particular assets to prevent market destabilization during liquidity stress.
• The guidelines are not prescriptive, meaning institutions must tailor their buffer strategies to their specific risk profiles, business models, and exposures.
• Supervisory review is encouraged, but the guidelines are primarily aimed at internal risk management processes.
• CEBS expects its members to ensure that institutions apply these guidelines by 30 June 2010 at the latest.

Economic Impact Considerations

• The guidelines aim to mitigate systemic risks by ensuring banks can withstand liquidity stress without resorting to costly or destabilizing measures.
• Buffer requirements may lead to structural changes in banks' balance sheets, such as asset restructuring and deleveraging.
• These changes could affect profitability and capital requirements, depending on the institution's ability to adjust pricing and manage liquidity risk.
• The economic impact is institution-specific, and the guidelines do not provide pre-defined parameters for stress testing.
• The benefits of holding a liquidity buffer outweigh the costs, as it serves as an insurance mechanism against future liquidity losses.

Conclusion

The CEBS guidelines provide a framework for liquidity buffer management, emphasizing the importance of tailored approaches, stress testing, and asset liquidity. They are designed to improve liquidity resilience and systemic stability, while acknowledging the economic trade-offs involved in implementing such measures.