We will resume the analysis on the CSF published by the EBA in October 2019. In order to provide some background, we made a detailed explanation of the results of the entities studied from the point of view of the components of the ratio in the first part of this analysis: liquid assets, outflows and liquidity entries.
In this second part we will analyze the ratio from a different perspective, considering the typology of entities and business models. In fact, thanks to this analysis we can see how two entities with a similar size and composition of their assets can have very different ratios depending on the financing structure they have, since the haircuts that are applied will vary; for example, two entities whose main financing is deposits but their counterparts are different (wholesalers vs. retailers) will have different percentages simply because of that “small” nuance.
The study classifies financial institutions in the following categories depending on their type of financing:
- Universal Banking
- Local Banking
- Real Estate Loan Entities
- Cooperative Banks
- Private banking
- Mortgage Banks
Taking this into account, all business models have an average of the ratio higher than required (100%). By categories, mortgage banks have the highest ratio with an average of 328%, followed by cooperative banks with a ratio of 189%, custodians with 169%, local banks with 146% and finally Universal Banking with 145%.
If we delve a little deeper into the data, the custodian banks have the level of HQLA’s higher in relation to others (between 20% and 60%) and net outflows of 15% of total assets. On the next step are both Universal and Local banks with an average of 20% of HQLA over total assets and net outflows between 10 and 40%.
Funding structure as key element
An important piece to understand the structure of the ratio according to the business of each entity is the composition of liquidity outflows. Those with a higher concentration of retail deposits, have a lower outflow rate as the runoff rate to be applied is less than another type of counterparts. Among these are local banks, savings entities and real estate lending entities. On the contrary, those entities with a greater concentration of wholesale deposits have a greater flow of outflows, coming from non-operational deposits, as reflected in the first part of the article.
As expected, the main source of financing for mortgage banks is securitization. However, these types of products are projected for more than 30 days, so they do not have a high impact within the outputs of the ratio. Its greater outflow comes from retail deposits that, as we have already seen, its run off rate is not very high, so its net outflows will be lower than the rest.
In the case of custodian banks and Public Development Banks, because their business model is not based on financing at the expense of retail deposits, they show the smallest reduction in net outflows and the haircuts to be applied to operational deposits and non-operational are major, the main source of financing for these banks.
Liquid Assets composition
On the side of the inflows, for the Custodian Banks, most of these come from the liquidity entries of financial clients because, due to their type of business, they play a more important role than in the other models.
Lastly, and doing a general review of all the types of business studied, the composition of the HQLA shows a high percentage of level 1 assets as well as a similar percentage of HQLA over the total assets (between 6% and 17%) excluding custodian banks, which have a large portfolio of liquid assets to compensate for the high levels of liquidity outflows that they have due to their business model based on the granting of liquidity lines.
Special mention for entities whose main business is the granting of consumer loans and auto loans, whose liquid assets are the lowest of all models. In fact, this very low level was the reason why the 90% cap on the inflows was established in order to avoid distorting the ratio.
Conclusions
As a conclusion and by way of conclusion we can say that most of the entities have experienced a great improvement of the LCR levels since the end of 2016 motivated to a greater extent by an increase in Liquid Assets. In fact, of the 136 entities analyzed in the study, only 4 suspended the test and did not reach the minimum limit of 100%. This fact cannot be explained only by a single factor, the most characteristic being:
- Prevalence of business models with good levels of liquid assets.
- Low-rates environments that currently predominate in the European Union.
- Assistance to entities by central banks to improve their profile of liquid assets (as we saw in the first part of the article)
On the other hand, the average of the ratio by business model also exceeds the minimum required, finding notable differences in the composition of the ratio depending on the type of financing that each entity chooses as a business model (wholesaler vs retail).
So, this is our analysis of the study of the Liquidity Coverage Ratio to European banks. We hope you found it interesting and didactic. Any questions or comments about it, do not hesitate to write to us, we will be happy to answer.
