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Need for a specific consolidated treatment
The methods proposed by the EBA which allows obtaining an assessment of the additional collateral outflows makes sense economically at a solo entity level. However, there is no specific consolidated treatment considered by the EBA at this stage. It is proposed that the institutions estimate the additional collateral outflows at a group level by aggregating the outflows calculated on the solo entities. EBF Members are not in favour of this approach.
Indeed, the proposed methods may lead to estimation that two solo entities would both experience outflows on the same intra-group transactions. On the solo entities level, this makes sense, but on the consolidated level, the aggregation does not reflect the actual liquidity risk experienced by the Group.
In addition, the approach proposed by the EBA will penalise the banking groups having a centralised management of their collateral even though this organisational model generally tends to reduce the operational risk within the group.
For these reasons, the EBF strongly supports a specific consolidated calculation excluding intra-group transactions that would make sense economically and then strengthen the liquidity risk management.
Need for alignment with the LCR
In the LCR, the numerator and denominator are closely interlinked, and it is not logical to look only at the denominator without taking into account the impact on the numerator and vice versa. The proposed RTS does not always follow this logic, requiring higher levels of aggregate liquidity buffers. Take for example, an institution that is sensitive to interest rate decreases which will see an increase of the market value of debt securities in their liquidity buffer (HQLA) when interest rates decrease. This will partly offset the collateral outflow due to interest rate decreases and therefore should be included as an inflow. Another discrepancy is that inflows can only be taken into account if they consist of HQLA assets, whereas all outflows are taken into account.
Scope of analysis
Although the definition in the CRR Article 423 (3) (potential collateral outflows resulting from a negative market scenario for derivatives and repos) should make reference only to “margined” derivatives/repos transactions (therefore subject to payment of additional collateral in the event of a loss in value of the derivative/repo), it might be important to make explicit in the RTS that "only" the derivative/repos subject to margining enter into the scope of the analysis (and should therefore exclude all derivatives/repos that are not subject to margining). It would therefore be beneficial if EBA were to carefully include the definition of ‘margining sets’ in the RTS, to allow for independent reading of the RTS. In this context, it is also not clear why article 2 (1) d requires institutions to determine the gross amount of additional outflows by adding together all value decreases resulting from the re-valuation of point 2 (1) c.
Need for more flexibility in the choice of the methods
The draft RTS does not allow the institutions to combine methods for calculating their additional outflows and to revert from the use of a method to the use of another less sophisticated approach. This seems very restrictive. The EBF strongly urges for more flexibility on this matter, especially since the total amount of additional liquidity buffer requirements is considered steep, compared to the actual outflows that are to be expected.
Historical look back approach as a back stop
Due to highly conservative assumptions used in building scenarios (extremely high confidence level, high percentages of shock, prudential treatment of inflows, different degrees of inclusion of diversification and correlations, etc.), the three methods proposed (simplified, standard and advanced/UNE methods) could lead to results excessively harsh and far from the historical observations. For this reason, the methodology introduced by BCBS in January 2013 could be used as a benchmark to define the maximum amount of loss in all the three methods.