BNP Paribas’s LCR hit record high in 2020 in wake of deposit glut

HQLA jumped 10% in Q4

BNP Paribas’s liquidity coverage ratio (LCR) surged eleven percentage points over the last three months of 2020 to 135%, its highest level on record, reflecting a late-year build-up of easy-to-sell assets to match ongoing deposit growth.

The bank’s rolling 12-month average of high-quality liquid assets (HQLA) –  which form the numerator of the LCR – hit €402.2 billion ($481.1 billion) at end-December, up 10% on end-September and 34% on a year prior. Net cash outflows, which make up the denominator, climbed 6% on the quarter and 17% on the year to €297.6 billion.

Wholesale deposits largely drove the spike in cash outflows. The LCR-weighted value of projected outflows from unsecured non-retail funding jumped €9.5 billion (4%) over Q4 and 12% over the year. These made up around half of the bank’s gross cash outflows at year-end.

 

Other types of cash outflow that increased materially over Q4 include those linked to derivatives exposures and collateral requirements (€3.9 billion) and “other contractual funding obligations”, which include revolving credit facilities (€2.7 billion).

The fourth-quarter increase to BNPP’s LCR was the largest going back to Q4 2016, when the ratio jumped from 112% to 127%. The HQLA and outflow increases were the biggest going back at least four years, to when disclosures were first made publicly available.

 

What is it?

The LCR is one of two liquidity ratios introduced by the Basel Committee on Banking Supervision in the wake of the financial crisis. It requires banks to maintain a sufficient stock of liquid assets – HQLA – to cover projected net cash outflows over a 30-day period of stress.  

Why it matters

BNP Paribas said its use of the European Central Bank’s (ECB) targeted longer-term refinancing operations over 2020, together with the influx of deposits, were most responsible for its LCR increase last year. The bank also explained that in accordance with its “sterilisation principle”, short-term funding is immediately put into HQLA, thereby preventing incoming liabilities upsetting its LCR.

As for Q4 specifically, the jump in cash liabilities can be explained in part by corporate clients drawing down state-guaranteed credit lines and putting the proceeds in their deposit accounts.

One BNP executive called the ECB’s liquidity programme a “structural” shift, one that won’t be reversed for many years, suggesting the bank may hold higher amounts of HQLA for some time to come. Customer deposits, though, may fall over the year, especially if the bank incentivises its clients to allocate their liquidity elsewhere.

BNP chief executive Jean-Laurent Bonnafé told analysts in February that the bank will try “to add value to this cash”, which would be “good for our clients, and ... also be a source of revenues for us”.

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