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EBA Guidelines on the Determination of Adverse Effect of Asset or Liability Liquidation on Financial Markets

Core Content

These guidelines, issued under EBA/GL/2015/05, provide supervisory practices for resolution authorities to assess when the liquidation of assets or liabilities under normal insolvency proceedings could have an adverse effect on one or more financial markets, as outlined in Article 42(14) of Directive 2014/59/EU. The aim is to ensure convergence in supervisory and resolution practices across the European Union.

Scope and Applicability

• Applicability: The guidelines apply to resolution authorities.
• Effective Date: The guidelines are effective as of 1 August 2015.
• Review Date: They should be reviewed by 31 July 2017.
• Compliance Requirement: Competent authorities and financial institutions must comply with these guidelines or provide reasons for non-compliance by 07.10.2015.

Main Views and Key Information

The EBA emphasizes that resolution authorities must assess the potential adverse effects of asset or liability liquidation on financial markets without assuming that asset quality has deteriorated or that markets are dysfunctional. The assessment should be based on objective market indicators and the specific circumstances of the case.

Key Assessment Elements

Resolution authorities should evaluate the following elements when assessing the adverse effect of liquidation:

(a) Market Impairment

• Liquidity development of the markets for the assets or comparable asset classes.
• Whether the assets or comparable asset classes have been classified as impaired for accounting purposes.
• Incurred losses and unstable cash flows.
• Downward value adjustments or price developments of associated hedges.
• High volatility in prices, especially price differences between markets.
• Reduction in share prices and deterioration in ratings and refinancing conditions of institutions holding significant amounts of these assets.

(b) Impact of Disposal

• Size of the market and range of potential purchasers.
• Expected impact on prices of comparable assets.
• Timeframe for liquidation, including the possibility of accelerated distress sales.

(c) Financial Market Situation

• Risk of a systemic crisis, based on the number, size, or significance of institutions at risk.
• Potential for contagion, especially if institutions hold large amounts of the assets.
• Effects on short- or medium-term funding prices.
• Impairment of the interbank funding market, including increased margin requirements, decreased ratings, and reduced collateral availability.

Special Considerations for Asset and Liability Transfers

Where resolution authorities consider the transfer of assets and liabilities (e.g., portfolios of derivatives or trading assets), they should:

• Assess the elements in (a) and (b) at the portfolio level and compare with similar portfolios.
• Evaluate the impact of unwinding the portfolio on financial markets.
• Consider effects on counterparties, such as the discontinuation of hedging relations and the need for replacement.
• Account for the impact on or special requirements of central counterparties.

Final Provisions

• The guidelines are binding on competent authorities and financial institutions.
• Non-compliance will be assumed if no notification is submitted by the deadline.
• Notifications must be sent via the form provided in Section 5 to compliance@eba.europa.eu with the reference 'EBA/GL/2015/05'.
• Published notifications will be made available on the EBA website.