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.
The week in Risk.net, February 10-16 2017Receive this by email