The Part II of the entry about the second report (link to Part I) will summarize the specific practices or approaches for which additional guidance is provided by the EBA. Specifically, the report provides additional guidance about:

  1. LCR optimization risk (maturity concentrations).
  2. Treatment of fiduciary deposits.
  3. Interdependent inflows and outflows for LCR purposes.
  4. Treatment of Deposit Guarantee Schemes (DGS) deposits.

1. Monitoring of maturity concentrations

The EBA has performed a quantitative data analysis regarding the 30-day horizon based on COREP data on a sample of banks (complemented by various qualitative analyses and observations reported by competent authorities) to find possible cases of optimization of the LCR horizon. A theoretical 5-week proxy LCR was calculated, based on the maturity ladder where outflows are expected to be greater than within the 30 days horizon. Two approaches have been followed:

  • The first one (main approach), only uses the 30-day to 5-week time bucket from the maturity ladder and adds the outflows and inflows (after weighting) to the calculation of the LCR denominator.
  • The second one (alternative approach), does not use the outflows and inflows reported by the banks but instead approximates both the 30-day LCR net outflows as well as the hypothetical 5-week net outflows based on the cumulated outflows and inflows (after weighting) reported in the maturity ladder.

It is to be noted that a ‘precise’ estimation of a hypothetical 5-week LCR is not possible owing to some differences between the LCR and maturity ladder templates.

In institutions for which concentration appears material, a bucketing approach was used, as illustrated in next Table 1, which provides the number of credit institutions that would experience an impact of more than 7.5 to 30 percent on the denominator when extending the horizon from 30 days to 5 weeks. Additionally, the table provides information on the recurrence of exceedance of each threshold: whether it occurs for just one reference date or for up to all six reference dates. For example, 16 credit institutions (4+4+8 as shaded in grey) would exceed a 10% impact for at least four out of the six reference dates.

In Table 2, the same information is provided in regard to the results from the alternative approach (based solely on the maturity ladder).

Building on the combination of quantitative and qualitative information collected, preliminary observations could be made. It appears that, while optimization may not be widespread in a systematic manner, some banks may persistently engage in some degree of optimization practices.

Regarding these practices, the EBA insists that there are several risks that can result from a product with a notice period.

  • First, the notice period clauses may not actually hold in all cases, leading to a possibility of withdrawal within the 30 calendar day period, which should be captured in the LCR.
  • Second, there is the cliff risk to meeting the LCR, or more broadly the risk that the informational value of the LCR ratio (e.g. to supervisors) is undermined. Particularly, a bank may have a comparatively high LCR ratio if it attracts a lot of funding with a 31- or 32-day notice period. However, if depositors make use of the notice period because of stress or any other reason, the LCR would drop materially after one or two days (when the remaining maturity of the funding enters the 30-day LCR horizon).
  • Third, the risks are heightened if the funding subject to the notice period is highly concentrated in one or a few counterparties (observed in one of the banks), and/or if the product attracts a certain type of customer with homogeneous behavior (equally leading to concentration).

Another practice that could equally be a source of cliff risk, but which is not based on a notice period, is that of rolling over/renegotiating funding before a 30-day residual maturity is reached. In some cases, credit institutions renegotiate funding of, for example, 3 or 6 months, and agree with their funding provider (often intragroup) to redeem/rollover before reaching a residual maturity of 30 days. Sometimes, the intragroup funding provider is located in a different country. Clearly, attracting funding with a medium-term maturity can improve the funding profile of a bank. However, if a credit institution systematically pushes the roll-over of funding just outside the 30-day horizon, then the LCR ratio would not reveal the material (cliff) risks if the maturity of a large part of the funding expired.

The report includes policy guidance to mitigate cliff risks due to the concentration of outflows beyond 30 days. In particular, banks should:

  • Assess the potential withdrawals happening within the following 30 calendar days.
  • Monitor particularly where there is concentration with a small number of counterparties or intragroup. Detailed information should be provided in the ILAAP/SREP liquidity assessment process.

2. Fiduciary deposits

A legal entity, as a fiduciary, manages assets on behalf of third parties, including deposit placement activities, as follows (in a simplistic representation):

Fiduciary deposits can be placed in various forms, e.g. in the form of term deposits or as money at call without a fixed maturity. In practice, somewhat more sophisticated schemes can be observed where the final banks place deposit interest rate offers on an online platform of a Fintech and the original depositors place their monies with the final banks with the intervention of the fiduciary. These platforms intend to provide final banks with access to deposit funding without the need to have extensive infrastructure in each market. Simultaneously, they aim to provide the original depositors with market-leading interest rates from all over Europe without the need to switch/have multiple bank accounts across various final Banks.

In the context of fiduciary deposits, institutions and supervisors have raised concerns on the applicable LCR treatment, particularly the relevant outflow rate, from the perspective of the final bank receiving these deposits. This issue is material in two ways:

  • the amount that these transactions could reach,
  • the large difference in outflows rates that could be applied in the absence of clarity about the correct application of the legal framework. Indeed, a wrong reading of the rules could involve the application of outflow rates ranging from 5% (if fiduciary deposits are considered as stable retail deposits) to 100% if the counterparty is considered to be a financial customer, and 20%/40% if it is considered a non-financial customer.

Very detailed policy guidance is provided in the second report to clarify the LCR and also the treatment of NSFR from the perspective of all the parties involved in these transactions, in the context of fiduciary and interbank deposits. Specifically about the application of:

  • LCR inflow and outflow rates.
  • NSFR ASF and RSF factors.

3. Outflows with interdependent inflows

By default, total LCR inflows are capped at 75% of total outflows (the inflow cap). Therefore, banks always need to hold a liquidity buffer at least amounting to 25% of outflows. In line with the LCR objective to cover liquidity stress situations, this safety valve is introduced to cover situations where expected inflows might not be available in time, or ever, to pay outflows.

Against this backdrop, the netting of outflows and inflows considered interdependent for the calculation of the liquidity buffer requirements, an exemption to the inflow cap provided for in Article 33(2)(c) in conjunction with Article 26 of the LCR DR, is subject to certain conditions and requires prior approval of the relevant competent authority. Interdependent inflows may therefore be exempted by competent authorities from the inflow cap, meaning that credit institutions would not need to hold any liquidity buffer for the part of outflows netted by interdependent inflows on account of the fact that they would not trigger any liquidity risk.

It should be noted that the application of this Article, in cases where all/most of the outflows and inflows would be treated as interdependent, would lead to a situation in which the whole credit institution is exempted (or nearly exempted) from holding a liquidity buffer, meaning that the ability to pay outflows (also during stress periods) would rely solely or mostly on the inflows. These exemptions are placed in the context of specialized business models under the principle of proportionality, including, for example, credit institutions specialized in pass-through mortgage lending, institutions passing through promotional loans, in every case subject to certain criteria to be fulfilled and to the prior approval of the competent authorities. However, Article 26 does not specify the type of credit institutions, business models or transactions in relation to which it can be applied, other than what follows from the strict conditions established therein.

The EBA understands from exchanges with banks that a detailed list of products benefiting from the treatment this Article would be welcome. Nevertheless, this is not possible. The eligibility of a transaction to benefit from Article 26 depends on its particular characteristics and arrangements and their compliance with the conditions required in it. Competent authorities need to assess whether these transactions with their own characteristics and arrangements fulfill the conditions required therein. However, precise policy guidance is included in the second report to ensure a sufficiently robust and consistent treatment across EU institutions and jurisdictions.

4. DGS conditions for a 3% outflow rate in retail deposits

LCR DR envisages the application of a 3% outflow rate on stable retail deposits covered by a deposit guarantee scheme (DGS) from 1 January 2019 (instead of the usual 5%) if authorized by the relevant competent authority after having obtained prior approval from the Commission which must assess whether certain conditions are complied with by the relevant DGS.

Specifically, Article 24(4) and (5) of the LCR DR sets out that the following conditions need to be met:

  • The retail deposits should be stable retail deposits.
  • The amount on which to apply a 3% outflow rate cannot exceed EUR 100 000 per depositor.
  • Existence of a reasoned justification/evidence that the run-off rates would be below 3% during any LCR stress period.
  • The amount of the retail deposits to apply a 3% outflow rate has to be covered by a DGS in accordance with Directive 2014/49/EU that meets the following criteria:
    1. The DGS needs to be pre-funded, i.e. the DGS has available financial means raised ex-ante by contributions made by members at least annually.
    2. The DGS has adequate means of ensuring ready access to additional funding in the event of a large call on its reserves, including access to extraordinary contributions from member credit institutions and adequate alternative funding arrangements to obtain short-term funding from public or private third parties.
    3. The deposit guarantee scheme ensures a seven working day repayment period from the date of application of the 3% outflow rate.

The report includes contains the harmonized methodology to be used by the EBA in the exercise of its mandate for the assessment of conformity by the DGS. Specifically:

  1. A list of the necessary information to be provided to the EBA by the relevant DGS designated authority (assisted by the relevant DGS where the two are different) in the form of three questionnaires.
  2. The methodology that the EBA will follow to assess that information for the elaboration of its Opinion to the Commission on the compliance of the relevant DGS with the conditions established in Article 24(4) LCR DR.
  3. Other available information to be used in this assessment without prejudice to any further interaction with the DGS designated authority (and if necessary, the DGS where the two are different), and where relevant with the relevant competent authority, in order to obtain any clarification or additional information.


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