Liquidity requirements according to Basel III/CRD IV - A

Liquidity requirements
according to Basel III/CRD IV
A survey concerning Liquidity Coverage Ratio (LCR)
and Net Stable Funding Ratio (NSFR)
On behalf of Bankenfachverband e. V.
Management summary
A SURVEY ON BASEL III/CRD IV LIQUIDITY REQUIREMENTS
Contacts
Bankenfachverband e. V.
Michael Somma
Head of Economic Affairs
Littenstr. 10
10179 Berlin
Tel. +49 30 2462 596 16
[email protected]
Ernst & Young GmbH Wirtschaftsprüfungsgesellschaft
EMEIA Advisory/Financial Services – Quality & Risk Management
Dr. Karsten Füser
Mittlerer Pfad 15
70499 Stuttgart
Tel. +49 711 9881 14497
[email protected]
A SURVEY ON BASEL III/CRD IV LIQUIDITY REQUIREMENTS
Management Summary
Due to the general decline of mutual trust within the financial markets that came along with the general economic crisis, many banks have suffered from liquidity shortages despite adequate economic capital buffers.
Consequently, in the wake of the crisis, liquidity risk and its appropriate governance have moved into the focus
of regulators and market participants.
Basel III has introduced two liquidity ratios to enforce a quantitative governance of liquidity risk: Liquidity
Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR). The short-term liquidity ratio LCR is meant to make
sure that financial institutions are able to satisfy their need for liquidity within a defined liquidity stress scenario using a 30 calendar day time horizon. The structural liquidity ratio NSFR, on the other hand, should guarantee a matched maturity refinancing of a financial institution over a time period of one year. The Capital Requirements Regulation further details necessary computations and data collection with respect to both ratios at
a European level.
In order to counter the general uncertainties related to the introduction of both the LCR and the NSFR, the
Bankenfachverband e. V. has resolved to conduct a survey among its German member institutions. The survey
is intended to administer a comprehensive and reliable overview over the present liquidity situations of the
German member institutions and hence to possibly sharpen their awareness for possible problems. The Bankenfachverband has entrusted Ernst & Young with the conception, conduction and evaluation of the associated
research.
In total, 37 members of the Bankenfachverband in Germany have participated in the survey. These banks display a wide variety of core business areas and portfolio sizes, which in turn significantly influences the bandwidth of values of the liquidity ratios captured in the survey.
LCR and NSFR above regulatory minimum requirements
Need for action w.r.t. LCR
Need for action w.r.t. NSFR
Need for action w.r.t. LCR and NSFR
5 institutions
10 institutions
4 institutions
18 institutions
Figure 1: Overview of the results with respect to LCR and NSFR
Our analysis has shown that for the majority of the institutions, both present LCR and present NSFR values
indicate that corrective actions should be taken. Only five institutions were able to comply with the planned
regulatory minimum values of 100 % for both LCR and NSFR at the reference date of the survey. 14 institutions
are facing a need for action with respect to at least one of the two liquidity ratios (among these is one bank, for
which the NSFR could not be determined during the research period). 18 institutions are below the planned
regulatory threshold of 100 % for both of the liquidity ratios.
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300
200
LCR and NSFR above
regulatory minimum
requirements
100
Net Stable Funding Ratio (NSFR) in %
400
A SURVEY ON BASEL III/CRD IV LIQUIDITY REQUIREMENTS
Need for action w.r.t.
LCR or NSFR
0
Need for action w.r.t.
LCR and NSFR
0
100
200
300
400
Liquidity Coverage Ratio (LCR) in %
Figure 2: Distribution of LCR und NSFR results
Reading the Diagram: In the figure, each financial institution is displayed as a dot in the coordinate system. The x- and yaxis show the LCR value and the NSFR value, respectively. Values are artificially limited to a maximum of 400 %. Institutions in the red field are below 100 % with respect to both ratios. The yellow fields accommodate institutions with one
ratio below 100 %. In the green section, minimum requirements for both ratios are fulfilled. An NSFR of 0 % was assumed
for the institution, for which the NSFR could not be determined during the research period.
Concerning LCR results, only nine out of 37 institutions currently comply with the planned regulatory standard
of 100 %. The majority of institutions does not attain this target ratio. The overall bandwidth of measured LCR
values lies within a very wide range of 0 % to 1634 %, whereas a large number of participating institutions (16)
display an LCR of less than 10 %, indicating a very urgent need for action.
The essential driver for low LCR values is a low stock in eligible liquid assets in combination with a high cash
outflow ratio. Namely, among the institutions with an LCR lower than 10 %, more than 85 % have eligible liquid
assets amounting to less than 1 % of total assets. Additionally, many of the institutions have a high cash outflow of more than 10 % of total assets.
Furthermore, the source of funding has a significant influence on the LCR value. Apart from a single exception,
all institutions with an LCR of at least 100 % use deposit business as a basic source of funding. More than that,
the 147 institutions with the largest LCRs almost exclusively have deposit business as one essential source of
funding. On the other hand, all institutions with an LCR of 0 % did not have deposit business as a source of
funding.
LCR regulations provide that eligible cash inflow be limited to 75 % of cash outflow. Hence, eligible liquid assets
amounting to at least 25 % of cash outflow have to be held available. This 75 % cap is relevant for 12 out of the
37 institutions. For them, it means that they will not be able to rely solely on cash inflow in order to comply
with regulatory minimum requirements concerning liquidity.
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A SURVEY ON BASEL III/CRD IV LIQUIDITY REQUIREMENTS
Participating institutions would have to invest 5.6 bn EUR if they wanted to stock up on eligible liquid assets
until compliance with the regulatory target was reached. On average this means that those institutions will
have to invest more than 13 % of their total assets into eligible liquid assets.
NSFR results do paint a much brighter picture. All in all, 15 out of 36 institutions feature an NSFR of 100 % or
higher (for one bank, the relevant data delivery was not sufficient to compute NSFR). Actual NSFR values range
from 14 % to 651 %, displaying far less variance than for LCR.
Again, institutions with deposit business as a primary or significant source of funding performed better concerning NSFR values. In particular, deposit business is an essential source of funding for 80 % of the institutions
which feature an NSFR of more than 100 %.
In terms of a summary, the survey indicates significant and overall need for action across participating financial institutions. Particularly, LCR results are quite visibly below the regulatory target value of 100 % for many
institutions and portend notable pressure towards adjustments. On the one hand, these adjustments will materialize in the necessary acquisition of a portfolio of eligible liquid assets. For many, primarily smaller, institutions, this also means an investment into a new asset class, and entails the conduction of a new products
process, and the establishment of corresponding business- and risk management processes in accordance with
the minimum requirements for risk management (MaRisk). More than this, there will be consequences for the
profitability of institutions, in case profit margins within the portfolio of eligible liquid assets are significantly
below the margins of the institutions usual business.
However, compliance with the minimum requirements will not always be attainable solely by the investment
into a portfolio of eligible liquid assets. In many cases, there will be repercussions on the strategic orientation
of the business and hence, on cash in- and outflows. For instance, institutions with a high cash outflow (indicating short term refinancing practices) will have to reassess their funding strategy.
When choosing among possible actions to be taken towards the end of, e.g., an LCR optimization, possible effects on NSFR must be taken into account. For example, switching from overnight money to time deposits with
a maturity of 60 days in refinancing would positively influence LCR, but leave NSFR quite unimpressed.
Last but not least, regulatory uncertainties need to be taken into account at present. According to the press
release of the Group of Governors and Heads of Supervision (GHOS) as of January 8th, 2012, no essential
changes in the Basel III regulation for the liquidity ratios are to be expected. However, modifications may be
impending for some key aspects such as the composition of the portfolio of eligible liquid assets and the calibration of the net cash outflows. At a European level, the European Banking Authority (EBA) will establish certain so called Technical Standards. Here, to make an example, an extended eligibility of mortgage bonds or of
asset backed securities is being discussed.
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A SURVEY ON BASEL III/CRD IV LIQUIDITY REQUIREMENTS
List of members of Bankenfachverband
The members of Bankenfachverband e. V. are listed below (in alphabetical order):
(source: homepage of Bankenfachverband, www.bfach.de):
abcbank GmbH
akf bank GmbH & Co KG
AKTIVBANK AG
Allgemeine Beamten Kasse Kreditbank AG
AUMA KREDITBANK GmbH & CO.KG - Bank für Finanzierungen
Bank Deutsches Kraftfahrzeuggewerbe AG
Bank11 für Privatkunden und Handel GmbH
Banque PSA FINANCE S.A. Niederlassung Deutschland
Barclaycard Barclays Bank PLC
BMW Bank GmbH
BNP PARIBAS LEASE GROUP S.A. Zweigniederlassung Deutschland
Brühler Bank eG
C&A Bank GmbH
CB Bank GmbH
Commerz Finanz GmbH
Credit Europe Bank N.V. Niederlassung Deutschland
CreditPlus Bank AG
CRONBANK Aktiengesellschaft
Deutsche Kreditbank Aktiengesellschaft
Deutsche Leasing Finance GmbH
Deutsche Postbank AG
DZB BANK GmbH
FFS Bank GmbH
FGA BANK Germany GmbH
Ford Bank Niederlassung der FCE Bank plc
GE Capital Bank AG
GE Money Bank AG (Schweiz)
GEFA Gesellschaft für Absatzfinanzierung mbH
GMAC Bank GmbH
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A SURVEY ON BASEL III/CRD IV LIQUIDITY REQUIREMENTS
Hanseatic Bank GmbH & Co KG
Honda Bank GmbH
IBM Deutschland Kreditbank GmbH
Ikano Bank GmbH
ING-DiBa AG
Iveco Finance GmbH
Mercedes-Benz Bank AG
MKB Mittelrheinische Bank GmbH
MKG Bank Zweigniederlassung der MCE Bank GmbH
netbank AG
NordFinanz Bank Aktiengesellschaft
norisbank GmbH
RCI Banque S.A. Niederlassung Deutschland
readybank ag
S-Kreditpartner GmbH
Santander Consumer Bank AG
SKG BANK AG
Standard Chartered Bank Germany Branch
Süd-West-Kreditbank Finanzierung GmbH
TARGOBANK AG & Co. KGaA
TeamBank AG Nürnberg
TEBA Kreditbank GmbH & Co. KG
TOYOTA KREDITBANK GMBH
UniCredit Family Financing Bank (Niederlassung der UniCredit S.p.A.)
UniCredit Leasing Finance GmbH
Valovis Bank AG
Volkswagen Bank GmbH
Volvo Auto Bank Deutschland GmbH
VON ESSEN GmbH & Co. KG Bankgesellschaft
VR DISKONTBANK GmbH
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