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Summary of Feedback to CEBS Consultation Paper on Liquidity Cost Benefit Allocation (CP36)

Core Content

The CEBS Consultation Paper on Liquidity Cost Benefit Allocation (CP36), published in March 2010, outlines a framework for incorporating liquidity costs and benefits into internal pricing mechanisms. The consultation period ended on 10 June 2010, and twelve responses were received, with one requesting confidentiality. CEBS also conducted a public hearing on 1 June 2010 to gather feedback from market participants.

The paper presents a summary of the main points raised in the consultation and outlines the changes made in response to these comments. The feedback was generally positive, with many respondents supporting the initiative to align internal pricing systems with liquidity risk management practices. However, there were several suggestions for clarification, refinement, and adjustments to the guidelines.

Main Points and Key Comments

General Remarks

• Respondents acknowledge the importance of the proposed framework for liquidity cost and benefit allocation.
• The framework is seen as a key component of liquidity risk management systems.
• Internal allocation of liquidity costs is essential for business planning and understanding the economic impact of liquidity on funding and buffer requirements.
• There is support for integrating liquidity cost/benefit allocation into transfer pricing systems.

Proportionality

• A majority of respondents welcome the reference to the proportionality principle.
• Some argue that the principle should also consider the funding structure of the institution.
• There is a call for more specific guidance on how to apply proportionality in practice.
• CEBS acknowledges the need for a balanced approach and emphasizes that the guidelines are principle-based rather than prescriptive.

Specific Remarks

• Clarification is needed regarding the requirement to define liquidity risk tolerance.
• Concerns were raised about the alignment of liquidity cost allocation with the internal transfer pricing system.
• Some respondents find the reference to "sight deposits" and "market liquidity cost" unclear.
• There are differing opinions on the use of internal models for liquidity cost benefit allocation.
• Examples provided in the paper are seen as either helpful or arbitrary.
• The concept of "marginal costs" and other related terms requires better definition.
• The calculation of liquidity buffer costs is considered complex and less precise than described.

CEBS Response and Revisions

CEBS has made several revisions to the consultation paper based on the feedback:

• Clarified the purpose of liquidity cost benefit allocation: It is now stated that the framework aims to reflect a variety of methods for attaching a realistic cost of liquidity to assets and off-balance sheet exposures.
• Emphasized the role of independent control units: The mechanism should be controlled and monitored by an independent unit (e.g., risk or financial control), separate from business units and the treasury function.
• Revised the language on proportionality: The guidelines now clearly state that they apply to a wide range of institutions, considering size, business model, and funding structure.
• Rephrased the implementation date: CEBS acknowledges the need for more time and proposes that the guidelines be implemented by 30 June 2011, with an expectation of implementation by institutions before 1 January 2012.
• Revised the language on transfer pricing systems: The guidelines now state that all institutions have some form of transfer pricing mechanism, not just large ones.
• Improved definitions and explanations: Terms such as "marginal costs," "average marginal costs," and "dynamic price setting" have been clarified.
• Acknowledged the transition to EBA: CEBS recognizes that the transition to the European Banking Authority (EBA) may require revising some guidelines into technical standards, and that institutions will have the opportunity to provide input.

Implementation and Future Considerations

• CEBS plans to conduct an implementation study in the second half of 2012 to ensure harmonization across Member States.
• The transition from CEBS to EBA may result in the development of legally binding technical standards, which will be subject to stakeholder consultation.
• The guidelines are intended to be a foundational part of the overall liquidity management framework, supporting sustainable business models and promoting efficiency in the banking sector.

Conclusion

The consultation on CP36 has led to a more refined and clearer set of guidelines on liquidity cost benefit allocation. While the framework is generally well-received, there is a consensus on the need for greater clarity, flexibility, and proportionality in its application. CEBS has responded to these concerns by making targeted revisions to the text, ensuring that the guidelines remain principle-based and adaptable to different institutional contexts.