CEBS out with liquidity risk CP part two

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LONDON – The Committee of European Banking Supervisors (CEBS) has opened a public consultation on its advice on liquidity risk management: the second part of its response to the European Commission's Call for Technical Advice on the issue.

The paper sets out CEBS’ preliminary recommendations regarding the management of liquidity risk by credit institutions and investment firms, and the supervision of liquidity risk by EEA prudential authorities. CEBS analysed the 2007-08 crisis, and benefited from input provided in regular meetings with experts representing a broad range of market participants and ad hoc meetings with banking associations and rating agencies, when drafting the recommendations.

The recommendations call for credit institutions and investment firms to have adequate liquidity risk management for both normal and stressed times, including liquidity buffers, robust stress tests, and regularly tested contingency funding plans. The board of directors should approve a liquidity risk strategy and risk tolerance appropriate to the institution’s funding profile and the sophistication of its liquidity risk management, taking into account all liquidity risks, including intra-day and contingent risks, as well as potential constraints on cross-border and intra-group flows. Appropriate responsibilities and incentives should be set by senior management through an internal cost/benefit transfer mechanism.

CEBS’ recommendations to supervisors call for a proportionate approach, allowing for recognition of internal methodologies on a case-by-case basis based on a thorough prior supervisory assessment, while acknowledging the benefits of a more standardised approach for institutions with a simpler liquidity risk profile.

These proposals are generally consistent with the revised Sound Practices for Managing Liquidity in Banking Organizations that have also been published today for consultation by the Basel Committee on Banking Supervision (BCBS). There are differences however as CEBS’s report covers the issues listed in the Commission’s Call for Advice and places special emphasis on the supervision of liquidity risk management.

The public consultation period begins today and runs until 1 August 2008, in parallel with the BCBS consultation. It has been shortened from the normal three months in response to a request from the Commission to adjust the work schedule to the timetable of the review of the Capital Requirement Directive. The Commission expects CEBS to deliver its final advice by September 2008.