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CEBS Consultation Paper on Liquidity Risk Management: Summary

Core Content

The Austrian Federal Economic Chamber's Bank and Insurance Division has submitted detailed comments on the CEBS Consultation Paper on liquidity risk management, focusing on the second part of CEBS's technical advice to the European Commission. The comments emphasize the need for proportionality, clarity, and practicality in regulatory requirements for liquidity risk management.

Main Views and Key Points

General Remarks

• Proportionality: The Division appreciates CEBS's emphasis on proportionality in liquidity risk management.
• Essentiality and Individuality: They welcome the established principles of essentiality and individuality in monitoring liquidity risk.
• Lack of Standard Model: It is noted that there is no generally accepted standard model for measuring liquidity risk, which makes it difficult for regulators to compare liquidity risk across different banks.
• Cost-Benefit Analysis: The Division suggests that all measures aimed at enhancing transparency should undergo a cost-benefit analysis to avoid unnecessary administrative burden and mismanagement.

Liquidity Buffer

• Definition Criticism: The current definition of liquidity buffer is considered too strict as it does not include undrawn committed credit facilities.
• Clarification Needed: The term "highly liquid" needs further clarification or should be removed, as liquidity can be managed over different time horizons.
• Not Sole Indicator: While agreeing that a liquidity buffer is essential, the Division argues that it should not be the only metric used to assess a bank's liquidity situation.
• Long-Term Changes Required: Increasing liquidity buffer through issuing long-term funding and purchasing AAA-rated government bonds may not be effective, as these assets are only useful in emergencies and could lead to losses due to credit spreads.

Survival Period

• Consideration of Non-Liquid Assets: The survival period calculation should not be limited to highly liquid assets, as banks might need to adjust their business models in severe stress scenarios.
• Avoid Benchmarking: The survival period should not be used as a benchmark for evaluating the soundness of a bank's liquidity risk management process if only highly liquid assets are considered.

Comments on Recommendations

• Recommendation 5: IT infrastructure cannot be set up without clear regulatory requirements and sufficient time for implementation.
• Recommendation 8: The consultation process with SPVs/conduits lacks clarity on how and by what principles it should be conducted.
• Recommendation 18: The information required under this recommendation could be very costly and may not offer significant added value, especially given the potential for daily changes in liquidity statements.
• Recommendation 28: The requirement for precise and up-to-date quantitative information is too vague and needs more specific definitions to ensure comparability among banks.

Liquidity Alliance

• Clarification Requested: The Division requests clarification on whether liquidity alliances should be considered as a form of funding diversification and whether joint liquidity management functions can be shared among associated institutions.

Conclusion

The Austrian Federal Economic Chamber's Division emphasizes the need for a balanced, flexible, and practical approach to liquidity risk management, advocating for clarity in definitions, cost-benefit analysis of regulatory measures, and the inclusion of a broader range of assets in liquidity assessments. They also highlight the importance of considering the role of central banks and the potential for collaborative liquidity management practices.