The European banking watchdog has published a consultation paper regarding the introduction of liquidity buffers
LONDON - The Committee of European Banking Supervisors (Cebs) has published its draft guidelines on liquidity buffers, aimed at improving the resilience of banks' risk management to future liquidity shocks.
The consultation paper (CP28) addresses the appropriate size and composition of liquidity buffers, on the principle that bespoke buffers should be in place to enable credit institutions to withstand a liquidity drought for at least one month without switching business models.
"As liquidity risk is largely institution-specific, Cebs encourages credit institutions to engineer their own individual counterbalancing framework, starting with robust bespoke liquidity buffers available outright over the defined 'survival period'," said Kerstin af Jochnick, chair of Cebs.
CP28 stresses that, when internal risk management functions build their firms' buffers, they should consider three types of stress test scenarios: idiosyncratic, market-specific and a combination of the two approaches.
It also sets a one-month time horizon as appropriate, as well as a shorter test of a single week, labelled an "acute phase of stress", requiring a greater degree of confidence on the capacity for the eligible assets to generate liquidity.
Cebs says the buffer's core should be based on cash and assets that are highly liquid in private markets and central bank-eligible, although for the longer stress period some flexibility is considered appropriate.
In a nod to pro-cyclicality lessons from the current crisis, Cebs also cautions it wants to avoid defining standardised parameters that might encourage a number of banks to trigger their buffers in similar market conditions, in turn posing further systemic risk.
Cebs will hold a public hearing on its plans for liquidity buffers on September 22, and public consultation will run until October 31.
Click here to read the CP28.
More on Risk Management
ABSTRACT This paper shows that traditional measures of bond systematic risk based on unadjusted past returns have very large downward biases. After we develop an improved method for calculating the market...
ABSTRACT This paper studies the approximation of extreme quantiles of random sums of heavy-tailed random variables, or, more specifically, subexponential random variables. A key application of this approximation...
ABSTRACT Because publicly available measures of deposit runoff risk are scarce, regulators' models to measure interest rate risk in the banking book are based on very coarse assumptions about the allocation...
ABSTRACT This paper analyzes and quantifies the idea of model risk in the environment of internal model building. We define various types of model risk including estimation risk, model risk in distribution...
Sign up for Risk.net email alerts
Sponsored video: Elseware
Oxford professor David Vines argues that the carrot is as important as the stick
Sponsored webinar: IBM
Watch highlights of this year's London conference
There are no comments submitted yet. Do you have an interesting opinion? Then be the first to post a comment.