The Committee of European Banking Supervisors (CEBS) today publishes its consultation paper (CP28) on liquidity buffers. This paper sets out draft guidelines on the appropriate size and composition of liquidity buffers with a view to enhance banks’ resilience to liquidity shocks. Bespoke buffers should be in place to enable credit institutions to withstand a liquidity stress for a period of at least one month without changing their business models.
Kerstin af Jochnick, CEBS’s Chair, noted: As liquidity risk is largely institution-specific, CEBS encourages credit institutions to engineer their own individual counterbalancing framework, starting with robust bespoke liquidity buffers available outright over the defined “survival period”.
CP28 proposes in particular that, when building their buffers, credit institutions consider:
- three types of stress test scenarios : idiosyncratic, market specific, and a combination of the two;
- a time horizon of at least one month; it will also be important to take into account a shorter time horizon of at least one week (acute phase of stress) during which a greater degree of confidence on the capacity for the eligible assets to generate liquidity would be required.
- that the core of the buffer should be composed of cash and assets that are both highly liquid in private markets and central bank eligible, although some flexibility might be appropriate for the longer end.
In particular, when it comes to stress tests for liquidity buffers, CEBS is keen not to define standardized parameters that could induce banks to trigger their buffers in similar market conditions, which in turn could pose systemic risks.
CEBS’s draft guidelines are aimed primarily at banks’ internal risk management, although they may be helpful for supervisory review purposes. They build on CEBS’s interim report on liquidity buffers and “survival” periods
published in March 2009 and should be read as a follow-up to CEBS’s Recommendations on liquidity risk management
published in September 2008, in particular to Recommendation 16 on liquidity buffers.
In elaborating its views, CEBS has benefited from input provided by industry experts nominated by Members and Observers of CEBS’s Consultative Panel (Industry Expert Group on Liquidity
CEBS submits its initial views for a public consultation which starts today and runs until 31 October 2009
. Comments received will be published on CEBS’s website unless respondents request otherwise. Please send your comments to: email@example.com
A public hearing will be held on Tuesday, 22 September 2009
at CEBS’s premises in London, from 10:30am to 12:30pm to allow all interested parties, including supervised institutions and other market participants, to put forward their views on the consultation paper.