On 19 November 2020, the European Banking Authority (EBA) published a report that provides a discussion about the functioning of the unwind mechanism of the liquidity coverage ratio (LCR). It shows the actual effect of this mechanism over a period covering the most recent years. The analysis is based on common reporting (COREP) of larger EU banks. The functioning of the mechanism under particular situations and the opportunity to change some technical aspects of the mechanism is also discussed.
The report finds that at the end of December 2019, the aggregate effect of the unwind mechanism was an increase in the level 1 assets, although no material effect was produced in terms of LCR. In addition, at bank level, few cases could be detected in which the unwind mechanism caused a relevant reduction in the LCR, and in all these cases the LCR would also have been lower than the minimum without the unwind mechanism. The EBA finds that, even under the hypothesis of a huge reduction in the reserves, the specific effect of the unwind mechanism would be immaterial.