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The Implementation of Basel III Liquidity Standards in CRD IV

The Implementation of Basel III Liquidity Standards in CRD IV The 2011 Forum on Basel III Implementation July 12, 2011, Zurich Stefan W. Schmitz Disclaimer: The opinion of the presenter does not necessarily reflect those of the OeNB or the Eurosystem. stefan.schmitz@oenb.at. Structure.

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The Implementation of Basel III Liquidity Standards in CRD IV

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  1. The Implementation of Basel III Liquidity Standards in CRD IV The 2011 Forum on Basel III Implementation July 12, 2011, Zurich Stefan W. Schmitz Disclaimer: The opinion of the presenter does not necessarily reflect those of the OeNB or the Eurosystem. stefan.schmitz@oenb.at

  2. Structure • Liquidity in the CRD IV – Pillar I • Harmonised liquidity reporting • QIS results • Liquidity in the CRD IV – Pillar II • Assessment • Impact on monetary policy implementation • Conclusions

  3. Liquidity in the CRD IV – Pillar I

  4. Current status • EU liquidity regulation • Heterogeneuousquantitative liquidity regulation • Heterogeneuous liquidity reporting(COREP) • High-level principles for liquidity risk management in pillar II • CRD II Annex • CEBS Guidelines

  5. Basel III liquidity standards BCBS International framework for liquidity risk measurement, standards and monitoring, December 2009 • Objectives • Harmonisation of quantitative liquidity regulation • Stability of individual institutions under stress • Systemic stability under stress • Liquidity stress tests • Instrumental to achieve more risk sensitive ratios • Static minimum stress scenarios • Standards • Liquidity Coverage Ratio (2015) • Net Stable Funding Ratio (2018)

  6. Objective Liquidity even under very severe liquidity stress over 30 days w/o gov & CB assistence Minimum requirements Liquidity Coverage Ratio (LCR)

  7. LCR: net-cashflow calibration (Summary)

  8. Objective Reduce maturity mismatch between funding and assets Assets > 1 y funded by liabilities > 1y Net Stable Funding Ratio (NSFR) (Summary)

  9. Challenges (I)

  10. Challenges (II)

  11. Challenges (III)

  12. Challenges (IV)

  13. Harmonised liquidity reporting

  14. Maturity mismatch template

  15. Challenges • WGL plans to develop a similar template • Focus on LCR • EBA template focuses on liquidity monitoring • Proportionality • Majority of banks should report monthly • Largest banks weekly • Rest quarterly • Similar waiver as for LCR can apply for liquidity sub-groups

  16. QIS results

  17. QIS results -1,730 bn € -2,890 bn € Source: BIS (2011).

  18. Main drivers LCR outflows Source: BIS (2011).

  19. Main drivers LCR inflows Source: BIS (2011).

  20. Composition of liquid assets Source: BIS (2011), Chart 6.

  21. Challenges • Potential behaviouralreactions • Reductionofrefinancing via unsecuredinterbankdeposits • Terming out andstaggeringoffunding via unsecuredinterbankdeposits • Promotingstabledeposits • Substitution of liquid for illiquid assets & within liquid assetstowardslowerhair-cuts • Off-balance-sheet: Reductionofundrawnliquidity/creditlinesunlessfairlypriced • Improvementofdataquality  Practicalchallenge in termsofcosts/economicimpactlow

  22. Liquidity in the CRD IV – Pillar II

  23. Pillar II – CRD II Annex V Qualitative liquidityregulation

  24. Relevant CEBS Guidelines • CEBS’S Technical Advise on Liquidity Risk Management (2nd part) • Guideline on Liquidity Buffers & Survival Periods • High level principles for risk management • Guidelines on Stress Testing CEBS • Guidelines on Liquidity Cost Benefit Allocation

  25. Challenges • Coherence across directives/regulations/guidelines • Coherent implementation/interpretation/application across EU • Principles based detailed guidance • Supervisory authorities often prefer „box-ticking“ approach • Expertise & judgement rule of law/liability of authorities

  26. Assessment

  27. Assessment (I) • International harmonisation of standards & reporting (EU) • Binding quantitative liquidity standards • Internalise negative externalities • But LCR/NSFR not binding for most banks • Maintain confidence under stress • Risk sensitive across balance sheet structures • Across banks/time  improvement wrt to simple stock approaches • But not risk sensitive with respect to market/banking environment • More refined stock approach with static run-off rates • Definition of components product specific • Liquidity risk characteristics/product innovation?

  28. Assessment (II) • Stress testingstocksproblematic • Insufficientpictureof li-situation • Preferrablegrosscash-flows & counterbalancingcapacity • Approach to liquid assetsinconsistentwith stress testapproach • Unintendedconsequences • Feedback on marketliquiditythroughfrozenportfolios/firesales? • Increasingreliance on CRAs  cliff-effects  feedback on markets • Scopeofapplication

  29. Assessment (III) • Consistencybetween CRD IV and CEBS Guidelines? • Distinctionpillar I & pillar II • Potential impact • Ratioswatered down substantially after QIS – still binding? • Competitionfordepositsintensivies – depositgrowth/long-term debtissuanceconstrainloangrowth • Challengesforemerging, fast growingeconomies • Interbank market – liquidityinsurance, structural li-deficit & monetarypolicyimplementation

  30. Impact on monetary policy implementation

  31. Arbitrage via CB Impact ofcrisis Unsecured interbank market LCR Structural liquidity deficit Main target rate Impact on monetary policy (I)

  32. Impact on monetary policy (II)

  33. Impact on monetary policy (III)

  34. Challenges for monetary policy Dynamic impact Increasing, /volatile structuralliquiditydeficit Arbitrage betweensecured & unsecuredimpaired LCR binding MRR slack Reform of framework Reduce MRR Narrow setofcollateral Re-establish arbitrage relationship Target Eurepo Channel approach More volatile structuralliquiditydeficit Narrow corridor

  35. Conclusions

  36. Conclusions Clear improvement Quantitative li-regulation based on a functionalapproach International harmonisation Harmonisationofmonitoring in the EU Improved qualitative regulation Main challenges Consistency across regulatory approaches Level of application Definition of liquid assets Impact on monetarypolicy

  37. Background material BCBS (2008) Principles for Sound Liquidity Risk Management and Supervision, Basel BCBS (2009) International framework for liquidity risk measurement, standards and monitoring, Basel CEBS (2008) CEBS’S Technical Advise on Liquidity Risk Management (2nd part), London CEBS (2009) Guideline on Liquidity Buffers & Survival Periods, London CEBS (2010a) High level principles for risk management, London CEBS (2010b) Guidelines on Stress Testing (GL32), London ECB (2008) Report on EU banks liquidity stress tests and contingency funding plans, Frankfurt Schmitz, S.W., A. Ittner (2007) Why central banks should look at liquidity risk, Quarterly Journal Central Banking Vol. XVII No. 4, 32-40 Schmitz, S. W. (2011) The Impact of the Basel III Liquidity Standards on the Implementation of Monetary Policy, mimeo OeNB, Vienna Liquidity Risk Management Workshop, RiskMinds 2010

  38. Appendix

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