Consultation response – new liquidity requirements for financial institutions
Norges Bank's submission of 15 September 2015 to the Ministry of Finance.
Reference is made to the Ministry's consultation letter of 19 June 2015 proposing rules for Norway that are aligned with the new liquidity framework for financial institutions in the EU.
Norges Bank broadly supports the draft regulation on minimum requirements for holdings of liquid assets (liquidity reserves). Finanstilsynet (Financial Supervisory Authority of Norway) is preparing a temporary Norwegian regulation that will include the main rules, which will be replaced by a reference to the pertinent EU regulations when these have been incorporated into the EEA Agreement. Norges Bank supports this approach.
LCR requirement for all currencies combined
Finanstilsynet proposes that all credit institutions should satisfy a minimum LCR requirement of 60 percent as from 1 October 2015. The proposal is in line with the minimum requirement in the EU. The proposed minimum LCR requirement for systemically important credit institutions and other credit institutions with more than NOK 20 billion in total assets is 100 percent as from January 2016. Norges Bank supports Finanstilsynet's proposal that the largest credit institutions should satisfy the LCR requirement ahead of schedule. Data as of June 2015 indicate that these institutions already largely satisfy the proposed requirement. Norges Bank shares Finanstilsynet's assessment that it is realistic for these institutions to achieve full LCR compliance as from 1 January 2016. Norges Bank also supports the view that other credit institutions can follow the EU's schedule for LCR implementation, with 70 percent LCR as from January 2016, 80 percent from January 2017 and 100 percent in January 2018.
LCR requirement for individual currencies
Finanstilsynet's fundamental perspective is that the institutions should as far as possible be self-insured against liquidity stress in NOK and other significant currencies. Norges Bank shares this view.
The main principle in the EU legislation is that the currency of liquid assets should match the currency of net liquidity outflows. An absolute match is not required. Some deviation is permitted as long as the minimum LCR requirement is met in total. National supervisory authorities can direct institutions to restrict currency mismatches by setting limits, individually or as common requirements for institutions with a similar risk profile, on the size of net liquidity outflows in one currency that can be covered by liquid assets in another.
Finanstilsynet will follow up the institutions and request an account of the reason for any reported LCR substantially below 100 percent in NOK or other significant currencies. Norges Bank supports this approach.
In Finanstilsynet's view, institutions should in principle have a high LCR in NOK, but there are a number of factors against requiring an LCR in NOK that is too high, one of which is the limited supply of liquid assets in NOK. Norges Bank agrees in general with Finanstilsynet's assessment and supports the view that an LCR requirement in NOK should not be set too high.
Considering market liquidity, the institutions' business models and individual conditions, Finanstilsynet does not find it appropriate to set a general minimum LCR requirement in NOK that applies equally to all institutions. Norges Bank holds the view that Finanstilsynet should define a minimum LCR requirement in NOK. Based on an overall assessment of the supply of liquid assets in NOK, effects on the money market, concentration risk in banks' liquidity portfolios, the risk of contagion in the event of liquidity problems and liquidity needs related to fluctuations in structural liquidity, Norges Bank recommends that individual LCR requirements in NOK should be set at a minimum of 60 percent. In Norges Bank's assessment, considerations regarding business models and individual conditions should not be given decisive weight. The LCR takes into account that the need for liquid assets can differ under varying business models. Developments in reported LCRs show that it is realistic to expect large institutions to satisfy an LCR requirement in NOK of 60 percent as from 1 January 2016.
The currencies that are significant for Norwegian banks can change over time. In the opinion of Norges Bank, an LCR of 100 percent should be required in all significant foreign currencies, not only in EUR and USD as suggested by Finanstilsynet. Norges Bank supports the introduction of a provision in the regulation that explicitly asserts Finanstilsynet's authority to set requirements in significant currencies for individual institutions. Norges Bank recommends that Finanstilsynet set a minimum LCR requirement for all institutions of 100 percent in all significant foreign currencies.
Norges Bank supports the proposal that institutions should publish their total LCR and their LCR in significant currencies each quarter. Norges Bank also holds the view that common and individual LCR requirements in NOK and other significant currencies set by Finanstilsynet under Pillar 2 should be published. This will give depositors, borrowers and investors a better basis for their assessment of banks' liquidity risk. Norges Bank supports the proposal to require the largest banks to report daily figures for the previous month for LCR in total and by significant currency at the end of each month.
EU legislation provides for derogations for currencies with constraints on the availability of highly liquid assets. In the European Commission's proposed supplementary rules, NOK is the only currency that qualifies under the derogation rule. Finanstilsynet does not provide a recommendation on the use of the derogation rule, but expresses the view that the implications of the rule are somewhat unclear in the light of the option for national authorities to set explicit liquidity buffer requirements in each currency. Norges Bank agrees with this assessment. Subject to the final design of the derogation rule, Norges Bank recommends that the Norwegian authorities take the opportunity to set limits for each currency and refrain from using the derogation rule. The two options cannot be applied at the same time.
Norges Bank supports the proposal that NSFR should be introduced as a minimum requirement of 100 percent for the largest institutions as soon as the final definition of the NSFR has been adopted by the EU. As Norwegian financial institutions already report their NSFRs to Finanstilsynet based on a method of calculation published on Finanstilsynet's website, Norges Bank recommends that the institutions publish this indicator value.
Mr. Øystein Olsen, Governor of Norges Bank
Ms. Ida Wolden Bache, Executive Director
- See page 8 in the 2014 Financial Stability Report, Norges Bank.
- A currency is significant if more than 5 per cent of the institution's total debt is issued in that currency.