EACB appreciates EBA’s efforts in developing a methodology to define highly liquid assets. It seems that a significant “academic” work has been done by EBA when developing the discussion paper. This is difficult to challenge in detail for the time being. Nonetheless, we would like to express some concerns and suggestions relating to the proposed methodology.
Scope of Application
The discussion paper explicitly mentions transferable (and listed) assets with high and very high liquidity and credit quality. This is in accordance with article 481 (2) CRR-draft. However, in addition to that, the current CRR-draft allows for further assets to be qualified as high liquid assets in the LCR (i.e. in article 404 (1) (1) lit dc.). Nevertheless, the classification criteria suggested by the EBA do not refer to these additional assets.
Impact of future regulation
The impact of the recent regulatory developments, such as Basel III and the EU’s financial transaction tax (FTT) proposal should be carefully considered. These will have a significant impact on market liquidity. In particular, the FTT proposal is expected to have a substantial negative impact on the debt securities and repo markets leading to considerable shrinking of such markets. This will reflect in the availability of short term liquidity. Combined with a restrictive definition of liquid assets, it could prove damaging to banking business.
Wider definition of liquidity
In general, the test of liquidity of an asset should not be limited to its transferability but must also take into account the ability of the bank to "repo" it. The repo market allows banks to raise funds on money markets by pledging assets - it is a key source of short-term liquidity.
The inclusion of level 2B assets as suggested by BCBS (amongst which RMBS) in the stock of HQLA will prove beneficial to the bank’s mortgage lending possibilities and thus have a positive impact on the real economy and housing market. Furthermore, it leads to a more diversified liquidity buffer. Nonetheless, the main EU problem still remains the restrictive definition of the liquidity buffer. The extension proposed by the Basel Committee (corporate securities rated BBB- to A+ and RMBS rated above AA), while remaining important in the case of some countries, it will have a limited impact because the European economy is mostly financed by banks and not by capital markets. Therefore, the HQLA should be extend the to all standby facilities granted by central banks and central bank eligible assets.
Additionally, we suggest to carefully review the requirements for liquid assets and to include other central bank eligible but non-tradable assets in the monitoring and evaluation exercise for the observation period. Historical data on many asset classes might not be readily available yet, but can prove to be important at a later stage. It must be ensured that after the observation period asset classes can become eligible for inclusion in the highly liquid assets category, if they fulfil a set of required criteria.
For the full position paper download the PDF