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ESBG Summary of Comments on CEBS Consultation on “CEBS Guidelines on Liquidity Cost Benefit Allocation” (CP 36)

Core Content

The European Savings Banks Group (ESBG) has submitted detailed comments on the CEBS consultation regarding the "Guidelines on Liquidity Cost Benefit Allocation" (CP 36). The main objective of the consultation is to improve liquidity management practices across financial institutions by introducing internal pricing mechanisms for liquidity costs.

Main Views

ESBG generally supports the initiative but raises several concerns regarding the scope and application of the proposed guidelines. The key points of their comments are as follows:

1. Proportionality Principle

• ESBG believes the guidelines should focus on minimum standards rather than overly ambitious "best practices".
• They emphasize the importance of applying the proportionality principle based on the institution's size, complexity, and funding structure.
• Smaller institutions should not be pressured to implement complex measurement mechanisms due to high costs and lack of data.

2. Cost Measurement and Internal Pricing

• ESBG supports the idea of considering both direct and indirect funding costs in internal pricing.
• However, they caution against unrealistic expectations of comprehensive cost measurement, especially in institutions where market prices are not readily available.
• They suggest that internal prices should primarily serve as a tool for understanding liquidity conditions, not as a direct determinant of lending rates or amounts.

3. Application to Different Funding Sources

• ESBG disagrees with the generalised approach to sight deposits as a funding source that requires anticipating draw-downs.
• They highlight that traditional retail banks have successfully managed sight deposits, even during the crisis.
• ESBG also questions the equal treatment of committed and uncommitted/implicit credit lines, arguing that uncommitted lines are less likely to be drawn and should be treated differently.

4. Granularity and Practicality

• ESBG agrees that granularity is important for liquidity allocation mechanisms.
• However, they warn against the expectation of individual internal transaction prices for each funding operation, especially when market data is unavailable.
• They recommend the use of collective internal prices for similar funding operations to avoid unnecessary complexity.

5. Structure and Implementation

• ESBG appreciates the lack of prescriptive guidance on the organisational setup of the allocation mechanism.
• They stress that the management body (or delegated government body) should be informed and approve both internal and external cost policies.
• They suggest that sections should be revised to reflect the proportionality principle and clarify the use of internal prices.

Key Recommendations

• Amend the definition of the guidelines to include the proportionality principle.
• Avoid generalised assumptions about funding sources, especially sight deposits.
• Clarify the difference between committed and uncommitted credit lines.
• Remove redundant sections, such as §20, and revise §19 to reflect proportionality.
• Avoid confusing terminology such as "marginal costs", "average marginal costs", and "current costs".
• Encourage the use of collective internal prices where appropriate.
• Ensure that internal pricing mechanisms do not lead to disproportionate costs or distortions in competition.

Conclusion

ESBG acknowledges the importance of improving liquidity management and internal pricing, but stresses that the guidelines should be practical, proportionate, and flexible. They advocate for a balanced approach that respects the diversity of financial institutions and their specific market conditions, particularly in the context of retail banking and smaller credit institutions.

Concrete Comments Summary

• Page 3, Section "Content": Add a clause respecting the proportionality principle.
• §4: Clarify that the definition of risk tolerance refers only to liquidity risk tolerance.
• §9: Clarify the role of liquidity allocation in balance sheet planning and mention the importance of capital and risk allocation.
• §10: Emphasize that organisational changes should not be required for smaller institutions.
• §14: Clarify the use of collective internal prices for similar funding operations.
• §15: Recommend not to single out sight deposits and allow institutional discretion in addressing indirect costs.
• §17: Propose a reformulation to distinguish between committed and uncommitted credit lines.
• §19-20: Suggest removing §20 and revising §19 to reflect the proportionality principle and the use of liquidity buffers.

About ESBG

• ESBG represents one third of the retail banking market in Europe, with €5,972 billion in total assets as of 1 January 2008.
• It is an international not-for-profit association focused on savings and retail banking.
• ESBG members are typically decentralized retail banks and associations, offering services in their respective regions.
• ESBG promotes responsible investment and corporate social responsibility in the European and global context.