29 October 2019

ECB: On the interaction between different bank liquidity requirements

This article empirically examines the interaction between the LCR and the NSFR for a sample of euro area banks. The results suggest that the two requirements are complementary and should not be regarded as shadow measures of each other.

While the two liquidity ratios are positively correlated, there is no evidence of a mechanical interaction between them since movement in one ratio does not necessarily imply movement in the other. Moreover, their relative tightness depends on the composition of each bank’s balance sheet and the requirements constrain different types of banks in different ways, with significant differences across business models.

This suggests that both requirements are needed to fully address liquidity risks in the banking sector, as they have different objectives and are meant to capture different types of risks.

Faithful and consistent implementation of both liquidity requirements across jurisdictions is needed to foster sound liquidity risk management, and ensure financial stability and a global level playing field for banks.

While the LCR has already been implemented in all major regions, the process for implementing the NSFR has not been initiated in all relevant jurisdictions.

The findings in this article illustrate that the LCR and the NSFR are complementary, constraining banks with different liquidity risk profiles in different ways.

This underlines the need for a faithful and consistent implementation of both measures (and the entire Basel III package more broadly) across all major jurisdictions, to maintain a level playing field at the global level and to ensure that the post-crisis regulatory framework delivers on its objectives.

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