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Summary of NVB Reaction to CEBS Consultation Paper 36 on Liquidity Cost Benefit Allocation

Core Content

The Dutch Banking Association (NVB) has provided feedback on the CEBS Consultation Paper 36 (CP36) titled "Liquidity Cost Benefit Allocation." The document outlines a framework for allocating liquidity costs and benefits to financial instruments, which NVB views as a significant topic for banks. The association appreciates the efforts of CEBS in developing this guidance and acknowledges its relevance to internal liquidity management practices.

Main Concerns and Key Points

1. Descriptiveness of the Consultation Paper

NVB expresses a general endorsement of the guidance provided but highlights a concern regarding the level of descriptiveness in certain sections of the document. Specifically, they feel that the paper lacks sufficient clarity on how to allocate liquidity costs, particularly in scenarios involving indirect liquidity costs.

• Indirect Liquidity Costs: NVB suggests that if the tenor of an instrument matches the funding used, the contingent liquidity costs should be zero. They argue that banks should only allocate costs to the current instrument and not assume additional costs for potential roll-overs, which should be considered separately at maturity.

2. Mismatch Liquidity Costs

NVB raises concerns about how mismatch liquidity costs are treated in the consultation paper. They believe that when an instrument is funded with a shorter tenor than its maturity, the transfer price of the funding should reflect all associated cost elements, including the premium for longer tenors.

3. Internal Price Setting of Liquidity

NVB points out that paragraph 25 of the consultation paper provides a detailed method for calculating transfer prices for liquidity, but it does not account for alternative approaches that may be more suitable for individual banks. They request CEBS to clarify whether the proposed method is an example or whether other methods are also acceptable.

4. Clarification Requested on Paragraph 3, Page 5

NVB is unclear about the meaning of paragraph three on page five of the consultation paper and requests further clarification in the final version of the guidelines.

5. Treatment of Uncommitted Lines of Credit

NVB questions the proposed charge for uncommitted lines of credit in paragraph 17, noting that this does not align with the Basel Committee's recommendations in the "International framework for liquidity risk measurement, standards and monitoring," which suggest excluding uncommitted lines from liquidity requirements. While they acknowledge the potential for moral hazard if roll-overs are not allowed, they believe the approach is overly strict and does not reflect the nature of uncommitted lines.

Conclusion

NVB's feedback emphasizes the importance of clarity and flexibility in the CEBS consultation paper. They recommend that CEBS provide more detailed explanations and ensure that the proposed approach is not perceived as the only acceptable method for liquidity cost benefit allocation. The association also requests specific clarifications on certain paragraphs to enhance the understanding and applicability of the guidelines.