Topic Liquidity requirements Liquidity requirements
Qualitative and quantitative liquidity requirements
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Quantitative liquidity requirements
Capital Requirements Regulation (CRR)
The Capital Requirements Regulation (CRR), Part VI, transposes the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR), which are set forth in the Basel III Framework, into law directly applicable to credit institutions. The CCR contains reporting obligations which served as the basis for the European definition of the LCR laid down by the European Commission in a Delegated Regulation, which was approved by the Commission on 10 October 2014. This means that, as a binding minimum standard, the LCR will enter into force at European level on 1 October 2015, subject to a non-objection period by both the European Council and Parliament.
The liquidity coverage requirement provides for the maintenance of a minimum liquidity buffer over a 30-day horizon to cover any net cash outflows occurring in the event of market-wide, idiosyncratic stress scenarios. Since 31 March 2014, institutions have been required to report LCR positions on a monthly basis in accordance with the CRR. As of 1 October 2015, such reports will be based on the provisions of the Delegated Regulation.
To enable institutions to gradually adopt the new minimum requirements, the LCR will be phased-in, beginning with a minimum required level of liquidity of 60% in 2015, which will be increased to 70% in 2016, 80% in 2017 and 100% in 2018.
In addition, the CRR requires a minimum of stable funding for non-current liabilities. Since 31 March 2014, stable funding positions must be reported on a quarterly basis. The Basel Committee published the revised Net Stable Funding Ratio (NSFR) on 31 October 2014. The European Commission has to decide by the end of 2016 if and how this figure will be introduced at European level.
German Banking Act (Kreditwesengesetz – KWG)
Under section 11 (1) sentence 1 of the German Banking Act, all institutions must invest their funds in such a way as to ensure adequate liquidity for payment purposes at all times.
Regulation on the Liquidity of Institutions (Liquiditätsverordnung – LiqV)
BaFin’s Liquidity Regulation (LiqV) sets out the requirements of section 11 (1) sentence 1 KWG in greater detail. The CRR, as higher-ranking law, permits institutions to continue to adhere to existing national liquidity requirements until the time when the LCR is binding and must be complied with at the minimum required level of liquidity of 100%. The Liquidity Regulation therefore also applies to CRR credit institutions until the LCR has been introduced in full. For non-CRR credit institutions, the Liquidity Regulation continues to apply for an unlimited period.
The Liquidity Regulation stipulates that an institution’s liquidity is adequate if the expected callable liabilities do not exceed its available liquid assets within the calendar month following the reporting date (maturity band 1).
As well as meeting these requirements, additional observation ratios must be calculated that are used to reveal the expected liquidity flows in maturity bands 2 to 4 (a period of over one month and up to one year). An opening clause in section 10 of the LiqV allows individual institutions to use a suitable internal liquidity risk measurement and management procedure, subject to certain conditions and following approval from BaFin. Institutions that use this option to mitigate their liquidity risk are exempted from the obligation to comply with and report the ratios required by the Liquidity Regulation.
Qualitative liquidity requirements
German Banking Act (Kreditwesengesetz – KWG)
Pursuant to section 25a (1) of the KWG, an institution must have in place a proper business organisation which ensures compliance with the legal provisions to be observed by the institution as well as fulfilment of business necessities. A proper business organisation must comprise, in particular, appropriate and effective risk management, on the basis of which an institution must continually safeguard its risk-bearing capacity.
Minimum Requirements for Risk Management
Institutions must meet qualitative requirements governing their liquidity risk management in addition to complying with quantitative liquidity requirements. The “Minimum Requirements for Risk Management” (Mindestanforderungen an das Risikomanagement – MaRisk, Circular 10/2012 (BA)) set out the qualitative requirements of section 25a of the Banking Act in greater detail. Under MaRisk requirements, institutions must ensure that they can meet their payment obligations at all times.
MaRisk module BTR 3.1 describes general requirements that must be met by all institutions. These include the preparation of a liquidity overview, the performance of appropriate stress tests, the preparation of contingency plans and the incorporation of liquidity-related cost/benefit considerations in the management of the institutions’ business activities.
Capital market-oriented institutions are subject to stricter requirements. Module BTR 3.2 requires among other things that they must maintain an adequate liquidity reserve in order to safeguard their solvency consisting of highly liquid assets for at least one week and using other assets for at least one month.