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EAPB Comments on CEBS Consultation Paper: Liquidity Buffers and Survival Periods

Core Content

The European Association of Public Banks (EAPB) has provided detailed comments on the CEBS consultation paper regarding the appropriate size and composition of liquidity buffers for credit institutions. The EAPB appreciates the principles-based approach of CEBS, which allows for flexibility in addressing diverse business models and liquidity risk management practices. They also commend CEBS for adhering to the principle of proportionality in its draft recommendations.

Main Views and Key Points

• Principles-Based Regulation:
  The EAPB supports the use of principles-based guidance, as it enables institutions to adapt liquidity buffer requirements to their specific circumstances. They emphasize that it is not necessary to list specific assets that may be included in the liquidity reserve, as this would limit flexibility.

• Stress Scenario Assumptions:
  The EAPB finds the description of idiosyncratic stress scenarios in paragraph 38 of the draft guidelines overly detailed and too conservative. They argue that assuming no rollover of unsecured wholesale funding during the acute phase of a stress scenario is not empirically supported, even during the peak of a crisis. Instead, they suggest that institutions should be allowed to use alternative assumptions, especially for credit lines with strong customer relationships.

• Survival Period Requirements:
  The EAPB does not consider it necessary to require two survival periods (one week and one month). They believe that a single one-month survival period is sufficient to ensure that institutions can withstand both moderate longer-term and acute short-term liquidity stress. They argue that the two-tiered structure does not provide meaningful control over liquidity risk and imposes an unnecessary burden on institutions.

• Composition of the Liquidity Buffer:
  The EAPB advocates that the central bank eligibility of securities should be the sole and decisive criterion for inclusion in the liquidity buffer. They believe that the requirement for securities to be highly liquid in private markets is excessive and may lead to an overestimation of liquidity risk. This criterion is already based on market liquidity, and the EAPB suggests that objective standards for "highly liquid in private markets" need to be defined before such a requirement can be justified.

• Diversification of Assets:
  The EAPB agrees that adequate diversification of the liquidity buffer is important for market liquidity. However, they question the requirement to avoid concentrations in central bank eligible securities, as long as the limits set by the central bank are not exceeded. They also find the requirement to be active in each market where liquidity assets are held excessive for smaller and retail-oriented institutions, due to high transaction costs relative to their traded volumes.

Conclusion

The EAPB encourages CEBS to conduct a more thorough impact assessment to evaluate the potential negative effects of the guidelines on capital markets. They also recommend revising the requirements for liquidity buffer composition and survival periods to ensure they are proportionate and practical for all types of institutions.