On 15 June 2023, the European Banking Authority (EBA) published a report on the monitoring of the implementation of the liquidity coverage ratio (LCR) and net stable funding ratio (NSFR) in the EU.

The EBA has already published two monitoring reports which aim to foster a higher degree of harmonisation in the implementation of the LCR in the areas where divergent practices have been observed, partly due to insufficient clarity on the regulatory provisions and providing guidance to supervisors and institutions on certain areas, such as outflows applied to certain categories of deposits.

In this report, the EBA analysed the potential liquidity and funding needs that EU banks might need to cover to maintain regulatory and prudent LCR and NSFR.

Furthermore, the report provides guidance to both banks and supervisors on how they should monitor, on an ongoing basis, the real capacity of markets and the economic conditions for potential funding sources. The EBA also highlights the importance for banks’ funding plans to include realistic ways in which to seek other funding to replace maturing central bank funding, where needed.

The report highlights the following observations and main conclusions:

• Pending the use of alternative funding sources, the repayment of central bank funding might cause a significant reduction of the LCR at the EU level. This downward impact would be exacerbated considering the cumulative effect of a reduction of the liquidity buffer and additional outflows due to the impact of an adverse market scenario on derivatives transactions and due collateral in repos.
• Pending the use of alternative funding sources, the maturity of all the remaining central bank funding could cause a fall of the weighted average NSFR that, while still relevant, is assessed as somewhat less material than for the LCR.
• The EBA welcomes supervisory actions being taken to adequately monitor the liquidity and funding positions of banks – a rigorous supervisory assessment of the banks’ funding plans to cover potential liquidity and funding needs is crucial.
• Funding plans should address potential funding needs affecting the LCR and NSFR simultaneously. This is to reflect that some funding alternatives that are useful for the LCR might not be the most appropriate for the NSFR, particularly as regards funding tenors or counterparties.
• Banks and supervisors should monitor on an ongoing basis the real capacity of markets and the economic conditions for potential finding sources.
• Banks that do not expect any impact due to the repayment of central bank funding should remain attentive to the evolution of funding markets to ensure that their ordinary refinancing strategies and normal business are not affected.

The EBA will continue monitoring some specific aspects of the LCR and NSFR due to current circumstances and interest rate environment to set out its observations and provide further guidance, where necessary.

The EBA will also assess further the need to amend/complement the existing regulatory reporting on liquidity requirements.