The Basel Committee on Banking Supervision (BCBS) has published its second paper on 11 October 2024 ( “The 2023 banking turmoil and liquidity risk: a progress report”) on its assessment and lessons learnt following the collapse of SVB and Credit Suisse in March 2023. The publication focuses on the additional analytical work that the Committee has undertaken on the liquidity risk dynamics, recommendations for supervisors and firms to consider as well as some of their next steps.
The paper focuses on some of the challenges that the Committee observed during the banking stress, including the speed and volume of deposit outflows, changes to banks’ funding profiles, banks’ operational readiness to face liquidity stress scenarios, in particular the ability to monetise liquid assets and the impact of social media and digitalisation of financing in accelerating bank distress.
In this article
What does this mean?
The BCBS highlights some key areas that supervisors should focus on to address the risks.
This includes whether the existing liquidity metrics alone are appropriate or whether these should be supplemented by additional indicators such as a short term counterbalancing capacity (e.g. five working days’ time) standard, which would assess whether firms have sufficient liquid assets to meet requirements over a short time frame, an assessment of a firm’s survival period, or a non-risk based liquidity metric, which could play a similar role to the leverage ratio in the capital framework.
They also consider whether the frequency of monitoring should be increased in normal circumstances to avoid possible negative signalling when more frequent monitoring is introduced during a stress.
Other recommendations include reviewing the monetisation assumptions applied to the liquid asset buffer, identifying additional liquidity needs such as those arising from intraday or increased collateral requirements, reviewing liquidity stress test assumptions in relation to concentrations and assessing liquidity transferability within a group.
The PRA’s supervisory framework already covers most of the BCBS’s recommendations (refer to Table 1) such as monetisation, concentrations and intragroup transferability and these should be reflected in internal stress testing and risk management frameworks.
| Table 1 | |
|---|---|
| Basel Committee recommendations |
PRA |
| Five-day forward counterbalancing capacity to monitor the liquidity position in five working days’ time | “Cashflow mismatch risk (Granular LCR)” in Statement of Policy - Pillar 2 liquidity allows for monitoring and setting of guidance although no specific indicator is required to be monitored |
| Survival period | ✔ - SS24/15 “Stress testing” and Statement of Policy - Pillar 2 liquidity “Cashflow mismatch risk (Granular LCR)” |
| Non-risk based liquidity metric, which could play a similar role to the leverage ratio in the capital framework | No |
| HQLA monetisation, including any barriers as a result of accounting treatment | ✔ - SS24/15 “Managing the HQLA buffer” and Statement of Policy - Pillar 2 liquidity “Cashflow mismatch risk” |
| Monitoring of concentrations and applicable outflow rates | ✔ - SS24/15 “Stress testing” |
| Transferability of liquidity within banking groups and assessment of trapped liquidity | ✔ - SS24/15 “Stress testing” and “Managing the HQLA buffer” and Statement of policy - Pillar 2 liquidity “Intragroup Liquidity” |
| Intraday and double duty risks | ✔ - Statement of policy - Pillar 2 Liquidity “Intraday liquidity” |
| Calibration of additional collateral requirements resulting from external counterparts such as central counterparties | ✔ - Statement of policy - Pillar 2 liquidity requires assessments of additional risks arising from initial margin on derivatives contracts and securities financing |
| Increased frequency of reporting in stress and business as usual | PRA may request more frequent reporting of metrics but this is typically in stress |
| Access to Central Bank emergency facilities and operational testing | ✔ - SS24/15 “Collateral placed at the Bank of England” and SS9/17 “Recovery Planning” |
Following the implementation of the new Investment Firm Prudential Regime (IFPR), the FCA has published implementation observations, which refer to similar themes, such as stress testing completeness.
In the US the Federal Reserve Board (FRB) updated its FAQs about Regulation YY in August 2024 which clarifies that banks may assume the use of central bank facilities along with private market options in their internal liquidity stress testing, including within the first 30-days. The FRB is also considering new liquidity requirements, which would require banks to maintain a pool of reserves and pre-positioned collateral with the central bank, based on the volume of their uninsured deposits. They are also considering whether to limit the extent to which banks could rely on held to maturity assets in their liquid asset buffer.
The EBA, in its Work Programme for 2025, indicated that, within the context of international developments, they may provide additional reflections on the implementation of liquidity metrics and related accounting aspects.
What do firms need to do?
Ensure HQLA monetisation assumptions are robust.
Review internal liquidity stress tests across multiple dimensions such as level of application, concentrations and depositor behaviour and counterbalancing capacity.
Embed requirements within the overall risk monitoring framework.
Firms should review their liquidity risk management framework across the three areas, as we expect supervisors to continue focussing on these in their interactions ahead of any potential policy updates.
A review of high-quality liquid assets (HQLA) monetisation which could include:
The development of granular (daily) monetisation profiles under various stress scenarios considering both the availability and depth of various markets, such as the repo markets.
The review of stressed haircuts, including those required by Central Banks and the impact on the liquidity value that can be derived from the HQLA.
The quantification of additional collateral requirements from external parties such as CCPs resulting from increases in traded volumes due to monetisation and a firm’s own credit deterioration. These could be both increased volumes of collateral but also higher quality collateral requirements.
A review of the impediments to monetisation, including liquidity trapped in local entities.
The impact of HQLA accounting treatment including interaction with other frameworks such as Interest Rate Risk in the Banking Book (IRRBB) and capital and ensuring an appropriate risk management of valuation changes to HQLA.
HQLA double-duty risks as a result of intraday, trapped liquidity or operational needs effectively reducing the amount of HQLA available to meet increased outflows.
A review of liquidity risk management which could include:
Adequacy of stress scenarios in considering requirements over a range of time horizons including intraday, a few business days and beyond.
Segmentation of the deposit book to identify interconnectedness between depositor types, concentrations and reactivity to real or perceived liquidity stresses. This review might inform the need to look at the diversification of funding sources.
A review of the level of application within a banking group to identify requirements both at a consolidated and local level, with consideration given to trapped liquidity.
- Review the amount of eligible collateral that is available for prepositioning at central banks, including how assets can be mobilised within a group to optimise the quantum.
A review of reporting and Management Information which could include:
The ability to produce reporting on a more frequent basis and with targeted areas of focus (such as on a specific depositor group).
The review of Early Warning Indicators (EWIs) to ensure that they are appropriate in number and calibration.
A review of the embeddedness of additional monitoring metrics within the overall risk monitoring framework.
- In addition, banks should also ensure that the above is reflected across documents such as Recovery Plans (including Contingency Funding Plans), ILAAPs and ICAAPs.
Next steps
The BCBS will continue to work on identifying issues that require additional guidance and assessing whether there is a need for policy options. As this work progresses we expect local supervisors to provide insight on potential regulatory developments in their territory.
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