Banks worldwide have built up liquidity buffers post-Covid

Most major banks have seen their liquidity coverage ratios (LCRs) improve through the coronavirus pandemic.

Of the 47 lenders covered by Risk Quantum that disclosed LCR data as of Q3, 34 (72%) reported higher LCRs at end-September than nine months prior. The average LCR sample-wide was 152%, up from 143%.

Banks in Japan had the highest LCRs of the sample as of end-September. The five banks from the country surveyed had an average LCR of 207% as of end-September, up from 200% nine months prior. Norinchukin had the highest LCR of the Japan banks and of the sample overall, at 383%.

 

The two Swiss banks in the sample, Credit Suisse and UBS, ended Q3 with an average LCR of 172%, up from 166% in Q4 2019. The 15 banks in the European Union had an average LCR of 157%, up from 144%, and the five UK banks an average of 150%, up from 147%.

Australian banks had an average LCR of 144% at end-September, up ten percentage points on nine months prior, and Canadian banks an average of 141%, up from 131%.

The 11 US banks analysed had the lowest average LCR of the sample, at 124%, up from 119% at end-2019. State Street had the lowest LCR of all 47 banks, at 109%.

Of the global systemically important banks (G-Sibs) in the sample, the LCRs of Credit Suisse and BNY Mellon fell the most over the nine months, both by eight percentage points. On the flipside, the G-Sib that saw its LCR increase most over the period was BNP Paribas. Its ratio increased from 123% to 147%.

 

Who said what

“It's an uncertain world, and I think [a large liquidity buffer at parent level] is a good thing to have at this point. It does clearly inflate our leverage … But I think, certainly, for the next few months – maybe the next quarter or two – it seems the right place to be, and I don't intend to revise it in the short term. As we go through 2021, we can think about it,” – David Mathers, CFO at Credit Suisse

What is it?

The LCR is one of two liquidity ratios introduced by the Basel Committee in the wake of the financial crisis; the other being the net stable funding ratio. The LCR is calculated as the ratio of a bank’s stock of high-quality liquid assets (HQLA) to net liquidity outflows over a 30-day stress period. Except where stated in the graphs, all LCRs referenced above are quarterly averages.

High LCR ratios can therefore reflect low net liquidity outflows, which would be the case if a bank could depend on large amounts of cash coming in from obligors within the stress period to offset outgoings, or a large stockpile of HQLA.

There are subtle differences in how the LCR was implemented in the US and the European Union. The US rule, issued by the Federal Reserve, requires firms to add a “maturity mismatch add-on” to net cash outflow, calculated by finding the difference between the cumulative net outflow at the end of the 30-day period and the peak net outflow within the period. This increases the LCR numerator, resulting in lower ratios than if the add-on were not included.

In addition, the US LCR disclosure uses the average of daily cash inflow and outflow observations within a calendar quarter, while the EU disclosure uses average month-end observations.

Why it matters

Banks around the world received an influx of deposits from panicked corporates, institutions, and retail customers at the outset of the coronavirus crisis. This river of cash was largely invested in HQLA, with lenders reasoning that their clients would likely reduce their deposit balances once markets calmed.

In certain jurisdictions, it’s true that cash piles have shrunk since the peak of the crisis. This seems to have been the case particularly among banks with large broker-dealer franchises, like Goldman Sachs and Morgan Stanley. However, big retail lenders and universal banks, like the UK’s Barclays, have continued to see their cash net outflows grow on the back of increased deposits, among other sources of funding.

Headed into 2021, most lenders will have to carefully balance the imperatives to retain sufficient HQLA to firefight any resurgence of financial panic, and to redeploy liquidity into higher-yielding assets. The latter will become more pressing as the rock-bottom interest rates introduced in the wake of the pandemic start to bite net interest margins.

Get in touch

Sign up to the Risk Quantum daily newsletter to receive the latest data insights.

Let us know your thoughts on our latest analysis. Email [email protected], or send a tweet to @LouieWoodall or @RiskQuantum. You can also get in touch via LinkedIn.

Tell me more

Post-Covid crisis, EU banks have thin dollar liquidity buffers

Credit Suisse, UBS slowed accrual of liquid assets in Q3

Liquidity buffers thinned at Morgan Stanley, Goldman in Q3

Barclays, unlike UK peers, saw its LCR surge in Q3

View all bank stories

• Tweet  
• Facebook  
• LinkedIn  
• Save this article
• Send to  
• Print this page  

• Topics
• Australia
• BBVA
• BNP Paribas
• BNY Mellon
• Canada
• Credit Suisse
• Europe
• Funding
• High-quality liquid assets (HQLA)
• Japan
• Liquidity
• Liquidity coverage ratio (LCR)
• Nomura
• State Street
• United States (US)
• Risk Quantum
• Banks
• Groupe BPCE
• The Norinchukin Bank
• Covid