Leverage Ratio And Liquidity Coverage Ratio: Final European Rules Will Be More International

From March 31th on, banks will have to regularly report detailed components of the Liquidity Coverage Ratio and the Leverage Ratio. The final European rules shall be defined by the EU-Commission until June 30th. To address remaining issues a public hearing took place on March 10th. As expected, the EU Commission points to deviations from European CRR rules and tends to follow the international Basel3 rules, in line with the latest EBA recommendations.

Main take-aways are (see also stakeholder-paper_en):

For the Leverage Ratio, the EU-Commission seems to follow the EBA report issued on 4 March 2014. EBA emphasized that the analysis underlying their report has not indicated any EU specificities which would lead to recommend a divergence from the Basel rules text.

Three hours of the 4 hour meeting were reserved for the Liquidity Coverage Ratio. The EBA addressed main issues in its report dating from December 2013. Remaining questions, among others, concern the components of the liquidity buffer:

  • Shall Covered Bonds be Level 1 or/and Level 2 assets: The European Covered Bonds Council sketched that Covered Bonds have been more stable throughout the financial crises than other asset classes. It is also important to note that a classification to either L1 or L2 depending on the rating adversely impacts the comparability as European jurisdictions have different Covered Bond Regulations.
  • Shall the currently known standby Credit Facility of Central Banks be part of the liquidity buffer: There is strong evidence that contrary to the CRR regulations, the final LCR rules will not include these kind of facilities. Instead, priced facilities shall be used by Central Banks to better manage the liquidity flows, as suggested by EBA and BCBS.
  • Shall securitisations be part of the liquidity buffer: Up to now only RMBS are included. A controversial discussion concerning Automotive-ABS led to the following statements: First, the EU Commission indicated that this will be under review in the future. It shall be monitored together with new regulations of the European securitisation markets. Second, the EBA states that the pool of liquid assets has to be directly managed by a bank. In this sense, RMBS is an exemption, but it is in line with the Basel rules.

Finally, several indications given throughout the Public Hearing point to a limitation of Level 2/ High Quality Liquid Assets in line with the Basel rules (max 40% L2).

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