21 February 2013

EBA: Discussion paper on retail deposits subject to higher outflows for the purposes of liquidity reporting under the CRR

This paper outlines the EBA's preliminary thinking on a methodology for identifying retail deposits subject to higher outflows and for calculating the associated outflow rates. The consultation runs until 21 March, 2013.

In the draft Capital Requirements Regulation (CRR), Article 409(3) requires the EBA, having taken into account the behaviour of local depositors as advised by national competent authorities, to publish either guidelines or implementing technical standards on the criteria for determining the conditions of application of paragraphs 1 and 2 of Article 409 in relation to the identification of retail deposits subject to higher outflows than specified. Furthermore, the EBA is to specify the definitions of those products and the appropriate outflows for the purposes of liquidity reporting. As required by Article 409(3), the proposal is to take into account the likelihood of these deposits leading to outflows of liquidity during the next 30 days. These outflows shall be assessed under the assumption of a combined idiosyncratic and market-wide stress scenario.

This discussion paper (DP) defines the characteristics of retail deposits that can lead to higher outflows and provides a methodology for calculating higher outflow rates. Higher outflow rates for retail deposits are considered as an exception to the outflow rates of at least 5 per cent and 10 per cent prescribed in Article 409 (1) and (2), respectively.

The DP provides such methodology on the basis of the experience and judgement of national competent authorities, which focused on the outflows observed during the financial crisis. The approach is deliberately not based on a data collection of observed outflow rates for two reasons. Firstly, the level of granularity needed for such an analysis was not readily available at the EBA or at national supervisory authorities, i.e. it did not reflect the full spectrum of retail product categories. Secondly, according to article 409(3), the data should reflect circumstances of market and idiosyncratic stress, which would restrict the data availability even further.

The prominent experienced characteristics that can lead to higher deposit outflows relate to factors such as volatility, volume of the deposit, relationship with the customer, distribution channel, currency of the deposit and yield. As stated in Article 409 (3) of the draft CRR, these deposits flows shall be assessed under the assumption of a combined idiosyncratic and market-wide stress scenario. Therefore, the criteria for identifying deposits subject to higher outflows seek to capture the volatility observed by institutions during stress periods and the volatility they assume in stress scenarios.

Based on the behaviour of local depositors, the EBA is considering a uniform methodology for determining higher retail deposit outflow rates taking into account the characteristics and the underlying factors displayed by these deposits. The application of these proposals by competent authorities across the EU should result in a consistent and comparable measure of outflow rates across institutions for deposits subject to higher outflows than specified in Articles 409(1) and 409(2) of the CRR.

Note that the mandate of the EBA in respect of establishing methods for identification of retail deposits and appropriate outflows has undergone substantial changes in draft versions of the CRR published respectively by the European Commission, the European Council and the European Parliament. In particular, not only does it remain uncertain whether the EBA will be requested to publish guidelines or implementing technical standards, but also the scope of the EBA mandate differs in the different versions of the text. Therefore the EBA will launch a consultation by publishing a Consultation Paper, at a later stage, once the EBA mandate is fully clarified and taking on board the subsequent benefits of the present Discussion paper.

Given the importance of the treatment of retail deposit outflows for institutions in liquidity reporting, regardless of the uncertainties surrounding the EBA mandate, the EBA believes that input from relevant stakeholders should be sought trying to promote better grounds while the state of the art remains nascent and unstable in the banking sector at this stage. This DP therefore outlines the EBA’s preliminary thinking on a methodology for identifying retail deposits subject to higher outflows than specified in Article 409 (1) and (2) and on a methodology for calculating the associated outflow rates.

Full discussion paper

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