Cebs stresses simplicity and communication in report on liquidity buffers

An interim report from Cebs gives preliminary views on developing liquidity survival periods, buffers and the assets they should contain

LONDON - The Committee of European Banking Supervisors (Cebs) has released an interim report highlighting the need for a simple and open approach to developing liquidity buffers and survival periods. The report is Cebs' response to a request from the Economic and Financial Committee and is part of the follow-up to Cebs 30 recommendations on liquidity risk management released in September 2008.

Cebs highlights the diversity of approaches to liquidity buffers across European Union national supervisors, and suggests a simple approach well communicated between stakeholders will allow for flexibility across the great breadth and complexity of institutions in the region.

Preliminary views are offered on steering the banking industry's approach to calibrating and determining the size and composition of liquidity buffers over a range of set time periods, in addition to taking stock of factors such as currency and differing legal jurisdictions. The proposals are the result of dialogue conducted through Cebs' Industry Expert Group on Liquidity.

Cebs says a liquidity buffer is dependent upon three dimenstions: the severity of stress scenarios, the time horizon determined as a 'survival period', and the characteristics of the assets in the buffer.

The report "tentatively" suggests one month is an adequate survival period. Assets used in a buffer should be highly liquid - convertible to cash "immediately or within a very short time". Banks should be able to closely estimate the amount of liquidity the assets can generate, through using haircuts when necessary.

Further work will try to determine the size of buffer necessary and the asset types it should contain. These refined proposals will be laid out in a consultation paper that Cebs says it will bring out in mid-2009.

The interim report can be read here.