Legal aspects of liquidity coverage ratio, net stable funding ratio and the internal liquidity adequacy assessment process

The Basel III accord of 2010 not only introduced new standards for capital adequacy, but also introduced the first harmonized international framework for liquidity management by banks. The liquidity management rules apply for European banks from 1 January 2014 as a reporting and calibration duty, and from 1 October 2015 the first liquidity standard, the Liquidity Coverage Ratio (“LCR”). The relevant provisions for the Commission Delegated Regulation with regard to LCR may be applied with using a phased in approach with “fully loaded” obligations from 1 January 2018. Apart from the very specific treasury managerial aspects of the LCR-Regulation, many legal topics are relevant for the interpretation too. The proper compliance with the LCR Regulation has a thorough impact on the definition of the terms and conditions to be entered into between banks and its customers, particularly in order to address expected liquidity outflows and assess predictability. Also from the liquid asset side, the regulations set forth in the LCR-framework for European banks are complex and contain certain choices that are debatable. Certainly, the preferential treatment of covered bonds as high quality liquid asset (HQLA) above securitisation positions has often been challenged by market participants. There are furthermore dependencies in the LCR-rules with the Deposit Guarantee Scheme regulations and the overall protection of retail deposits as one of the drivers to introduce new rules on liquidity management.

A further step in respect of introduction of quantitative liquidity management requirements, concerns the Net Stable Funding Ratio (“NFSR”)-rules that look to manage liquidity on the basis of a longer one-year horizon. Based on the EBA NFSR Report of 15 December 2015, rulemaking in Europe ends its last phase, whereas the United States adopted NFSR-rules in May 2016. The NFSR-rules equally have a significant impact on the shaping of the contractual relationship between the bank and its customers and particularly the interaction between LCR-rules and NFSR-rules requires proper coordination as regards the legal environment in which banks operate. Since the adoption and entry into force of CRD II of 2009, proper liquidity management is also subject to qualitative and organisational risk management requirements. Supervisors may request banks to comprise in the annual Pillar 2 exercise as regards capital adequacy, also the assessment of adequate liquidity in the so-called ILAAP process. This ILAAP-process is being calibrated to harmonize supervisory practices by the ECB as concerns significant banks and as regards all other Eurozone banks by developing common supervisory practices. EBA’s Guidelines on ICAAP and ILAAP information collected for SREP purposes of 3 November 2016 contribute to the streamlining of supervisory practices in Europe. The training course will provide for an elaborate analysis of these Guidelines too.