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Document 32015R0061

Liquidity coverage requirement for credit institutions

Liquidity coverage requirement for credit institutions

 

SUMMARY OF:

Delegated Regulation (EU) 2015/61 supplementing Regulation (EU) No 575/2013 with regard to liquidity coverage requirement for Credit Institutions

WHAT IS THE AIM OF THE REGULATION?

This delegated regulation sets out in detail how to apply the general principle introduced in Regulation (EU) No 575/2013, the Capital Requirements Regulation, that credit institutions must have enough funds to meet withdrawal demands over a 30-day period.

Known as the LCR (liquidity coverage ratio) delegated regulation, it specifies which assets are to be considered as liquid assets*. It sets out how expected cash outflows and inflows over a 30-day period should be calculated.

KEY POINTS

Credit institutions must maintain a liquidity coverage ratio of at least 100%. This is equal to the ratio between its liquidity buffer* and net liquidity outflows* over 30 days.

A credit institution is under stress* in the following situations (non-exhaustive list):

  • run-off of a significant amount of its retail deposits;
  • partial or total loss of its unsecured wholesale funding capacity or its secured short-term funding;
  • additional liquidity outflows from credit rating downgrade;
  • impact of increased market volatility on the value of its collateral;
  • unscheduled drawing on its liquidity and credit facilities;
  • potential obligation to buy back debt or honour non-contractual obligations.

Liquid assets must:

  • be a property, right, entitlement or interest, held by a credit institution, that may provide cash within 30 days;
  • not be issued by the credit institution itself or by other bodies such as investment firms, insurance undertakings or financial holding companies;
  • be able to have their value determined on the basis of easily available market prices;
  • be listed on a recognised exchange, or tradable by a direct sale or simple repurchase agreement*;

Liquid assets are divided into various categories:

  • Level 1 (the most liquid), such as coins and banknotes or assets guaranteed by the European Central Bank, national central banks or regional governments and local authorities;
  • Level 2A, such as assets guaranteed by regional governments, local authorities or public sector bodies in the EU with a weighted risk of 20%;
  • Level 2B, such as asset-backed securities, corporate debt securities, shares provided they meet certain requirements and certain securitisations* which must satisfy a range of strict conditions to be accepted as a Level 2B asset.

Credit institutions must ensure:

  • the assets in their liquidity buffer are always sufficiently diversified, readily accessible and can be turned into cash within 30 days;
  • they hold a minimum of 60% of the buffer in level 1 assets and a maximum of 15% in level 2B assets;
  • within 30 days, they do not treat as liquid assets those that no longer meet the criteria.

Detailed rules and calculations are used to determine and measure liquidity outflows and inflows and the procedures to be taken.

Commission Delegated Regulation (EU) 2018/1620 made certain amendments to the 2015 legislation to improve its practical application. The most important are:

  • align fully the calculation of expected liquidity outflows and inflows on repurchase agreements, reverse repurchase agreements* and collateral swap transactions* with the Basel Committee on Banking Supervision’s international liquidity standard;
  • specify the treatment of central banks’ reserves held by subsidiaries or branches;
  • adjust the waiver of the minimum issue size for certain non-EU-country assets;
  • improve the unwind mechanism* for calculating the liquid buffer;
  • integrate the new simple, transparent and standardised criteria for securitisation.

Commission Delegated Regulation (EU) 2018/1620 applies from 30 April 2020.

FROM WHEN DOES THE REGULATION APPLY?

It has applied since 1 October 2015.

BACKGROUND

For more information, see:

KEY TERMS

Liquid asset: an asset that can be easily converted into cash.
Liquidity buffer: amount of liquid assets a credit institution holds.
Net liquidity outflows: amount that remains after subtracting incoming from outgoing cash.
Stress: sudden or severe deterioration in a credit institution’s solvency or liquidity.
Repurchase agreement: also known as ‘repo’, this is a short-term loan whereby the seller of the security agrees to buy it back at a specified price and time.
Securitisation: a procedure where various financial assets or contractual debts, such as car loans or mortgages, are repackaged and sold to investors.
Reverse repurchase agreements: also known as 'reverse repo', purchase of securities with agreement to sell them at a higher price at a specific future date.
Collateral swap transactions: loan of liquid assets in return for less liquid collateral. The borrower pays a fee to the lender for the risks involved.
Unwind mechanism: closing down of transactions (such as repurchase or reverse repurchase transactions) which mature in the next 30 days.

MAIN DOCUMENT

Commission Delegated Regulation (EU) 2015/61 of 10 October 2014 to supplement Regulation (EU) No 575/2013 of the European Parliament and the Council with regard to liquidity coverage requirement for Credit Institutions (OJ L 11, 17.1.2015, pp. 1-36)

RELATED DOCUMENTS

Commission Delegated Regulation (EU) 2018/1620 of 13 July 2018 amending Delegated Regulation (EU) 2015/61 to supplement Regulation (EU) No 575/2013 of the European Parliament and the Council with regard to liquidity coverage requirement for credit institutions (OJ L 271, 30.10.2018, pp. 10-24)

Commission Implementing Regulation (EU) No 680/2014 of 16 April 2014 laying down implementing technical standards with regard to supervisory reporting of institutions according to Regulation (EU) No 575/2013 of the European Parliament and of the Council (OJ L 191, 28.6.2014, pp. 1-1861)

Successive amendments to Regulation (EU) No 680/2014 have been incorporated into the original text. This consolidated version is of documentary value only.

Directive 2014/49/EU of the European Parliament and of the Council of 16 April 2014 on deposit guarantee schemes (OJ L 173, 12.6.2014, pp. 149-178)

See consolidated version.

Directive 2014/17/EU of the European Parliament and of the Council of 4 February 2014 on credit agreements for consumers relating to residential immovable property and amending Directives 2008/48/EC and 2013/36/EU and Regulation (EU) No 1093/2010 (OJ L 60, 28.2.2014, pp. 34-85)

See consolidated version.

Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012 (OJ L 176, 27.6.2013, pp. 1-337)

See consolidated version.

Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC (OJ L 176, 27.6.2013, pp. 338-436)

See consolidated version.

Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories (OJ L 201, 27.7.2012, pp. 1-59)

See consolidated version.

Directive 94/19/EC of the European Parliament and of the Council of 30 May 1994 on deposit-guarantee schemes (OJ L 135, 31.5.1994, pp. 5-14)

See consolidated version.

last update 16.01.2019

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