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Summary of CEBS Technical Advice on Liquidity Risk Management in the EEA

Core Content

The CEBS document provides a comprehensive overview of the liquidity risk management frameworks adopted by EEA regulators, focusing on their objectives, regulatory requirements, and supervisory approaches. It categorizes the responses from EEA countries to questions regarding the aims of liquidity regimes, their application to different types of institutions, and the supervisory practices in place.

Main Objectives of Liquidity Regimes

The primary aims of liquidity regimes across EEA countries can be grouped into three categories:

• Meet payment obligations at all times at a reasonable cost: This is the most commonly cited objective, with responses from AT, IT, DE, and NL. Some countries also mention this as a key goal, albeit with variations in wording.
• Survival to a fixed horizon: This objective is explicitly or implicitly stated by SI, DK, CY, NL, UK, GR, FR, and IC. Some countries, such as the UK, differentiate between regimes aimed at survival and those aimed at meeting payment obligations.
• Adherence to best practices: This is mentioned by SK, SE, NO, MT, LU, IE, EE, RO, PL, LT, and BG. It is often aligned with the Basel Committee's Sound Practices for Managing Liquidity in Banking Organizations.

Some countries combine these aims, such as BE, GR, and FR, which mention both survival to a fixed horizon and adherence to best practices. A few countries, like CZ and FI, emphasize minimizing systemic risk or limiting excessive risk-taking as part of their objectives.

Addressing Market Failures

Only two countries (AT and UK) explicitly state that their liquidity regimes are designed to address specific market failures. Most responses suggest that while market failures are not the primary focus, they are addressed through various mechanisms such as:

• Stress testing (BE, ES)
• Contingency funding plans (SK, FR, ES)
• Alternative scenarios (FR)
• Lender of last resort (PT)
• Crisis scenarios (IT)
• Shocks of deposit withdrawals (MT, LT, CY)

Some countries, like NL, mention the ability of banks to withstand general and specific market failures, while others, such as GR, focus on the sustainability of the banking system under liquidity stress.

Regulatory Requirements and Application

Introduction and Updates

• The introduction of liquidity regimes spans from 1975 to 2007.
• 14 countries introduced their regimes before 2000, and 14 introduced or amended them after 2000.
• Most countries have reviewed and updated their regulations, though many changes are not classified as material. Only a few, such as DE, IE, PL, and GR, have implemented significant amendments.

Scope of Application

• Same requirements for credit institutions and investment firms: HU, IT, MT, NO, UK, and others.
• Different regulations or partial application: ES, IE, FI, FR, GR, LT, etc.
• No explicit liquidity requirements for investment firms: BE, CY, CZ, DK, EE, LT, LV, LU, SK.
• Not applicable: BG, LI, RO.

Application to Different Types and Sizes of Institutions

• Applicable to all types: HU, IT, LT, MT, NO.
• Applicable with some exemptions: AT, BE, CZ, DE, etc.
• Applicable only to banks: BG, CY, EE, LU, NL.
• Differentiated approach: DK, SI, UK, etc.
• Consolidated supervision: SE.
• Solo supervision: BG, IC, LV, SI, SK, LU.
• Solo and consolidated: BE, CZ, DK, ES, etc.

Home vs. Host Regime for Cross-Border Banks

• Host regime is applied by the majority of EEA countries (AT, BE, CY, DE, DK, EE, ES, FI, FR, HU, IE, IT, LT, LV, NL, NO, PL, PT, SI, SK, UK).
• Home regime is applied by MT.
• Both regimes applicable: RO and SE.
• Waiver arrangements are possible in some countries (DE, FI, GR, IE, IT, NL, NO, UK, etc.).

Application to Trading Activities

• Yes: All but one EEA country (LI) includes trading book activities in their liquidity risk management regimes.
• No: LI includes short-term liabilities falling due within one month, and UK excludes building societies from trading book requirements.

Treatment of Banking and Trading Books

• Treated differently: EE, FI, GR, IC, LU, SK.
  • Reasons: potential distress, different maturities, reporting requirements, risk weighting, and eligibility.
• Treated similarly: AT, BE, BG, CY, CZ, DE, DK, etc.

Consolidated vs. Solo Supervision

• Solo supervision: BG, IC, LV, SI, SK, LU.
• Solo and consolidated: AT, CY, DE, EE, FR, GR, HU, PL, RO.
• Consolidated only: SE.
• Exemptions: Some countries allow exemptions for small foreign branches or subsidiaries if they do not materially impact the group’s liquidity (e.g., less than 1% of total assets).

Large Exposure Limits

• Applicable to short-term intragroup exposures: CZ, GR, LI, LU, RO, SK, PT, UK.
• Not applicable: AT, BE, BG, CY, DE, DK, EE, ES, FI, FR, HU, IT, LV, MT, NL, NO, PL, SE, SI.
• Limits vary: 20% or 25% for certain countries (DE, IC, LI, LU, LV, NO, PL, PT, RO, SI, SK, FI).
• Special conditions: Exemptions may depend on consolidated supervision, and some countries apply limits to non-bank entities within the group.

Centralised vs. Decentralised Liquidity Management

• Centralised approach: Most countries (AT, BG, CY, CZ, DE, EE, FR, HU, IT, LT, LV, MT, NL, PT, UK) use a centralised approach for risk principles, policies, and contingency planning, but decentralise day-to-day management.
• Nordic countries (DK, FI, NO, SE) show a high level of centralisation.
• Decentralised approach: IC and PL.
• Mixed approach: BE, EE, ES, GR, IE, LU, SI, SK.

Quantitative Requirements

• 21 countries have explicit quantitative requirements (liquidity ratios, time horizons, etc.): AT, BG, CY, DE, DK, FR, GR, IC, IE, LI, LU, LT, LV, MT, NL, PL, PT, RO, SI, SK, UK.
• 9 countries do not have explicit quantitative requirements but implement reporting or case-by-case assessments.
• Mismatch approach: 14 countries use contractual maturity-based mismatch ratios.
• Cash flow-based mismatch: 11 countries use cash flow behavior to assess mismatches.
• Survival period approach: Only the UK explicitly mentions a 5-day survival period for its Sterling Stock regime.

Supervisory Assessments

• 27 countries conduct supervisory assessments of liquidity risk management, regardless of whether they use quantitative or qualitative approaches.
• Supervisory focus: Includes stress testing, contingency funding plans, and monitoring of liquidity risk through both internal and external means.

Conclusion

The EEA liquidity regimes are primarily aimed at ensuring the ability to meet payment obligations, survival to a fixed horizon, and adherence to best practices. While most countries apply a host regime to cross-border branches, some allow for home regime application or both. The majority of regimes apply to both credit institutions and investment firms, with varying levels of consolidation and centralisation. Quantitative requirements are widespread, with the UK being a notable exception in its approach to survival periods. Supervisory assessments are common and often include stress testing and scenario analysis to ensure resilience and transparency in liquidity risk management.