Liquidity Coverage Ratio (LCR)
The liquidity coverage requirement expects banks to hold a sufficient quantity and quality of liquid assets for the eventuality of a short-term (30-day) liquidity shock.
The introduction of liquidity coverage requirements may increase the resilience of financial institutions, as a higher liquidity buffer allows them to withstand higher liquidity shocks. In the event of a crisis, the absence of sufficient liquid assets may drive institutions to fire sales in order to maintain sufficient liquidity, which may induce a downward spiral in the given asset market.
Compliance with the liquidity coverage requirement can be ensured by raising the stock of high-quality liquid assets and by borrowing longer-term funds. On the whole, these steps may reduce the profitability of the financial sector, as the holding of liquid assets and the use of long-term funds are associated with relatively higher costs. Therefore, to avoid a significant deterioration of lending activity, the adequate timing of the instrument’s introduction is essential.
After the gradual increase of the expected level, within the framework of national discretion, the MNB expects the fulfillment of the LCR at a minimum level of 100 percent, earlier than the standard schedule, since 1 April 2016. The regulation must be complied with both on a consolidated and individual level.
Calculation of Liquidity Coverage Ratio
Frequently Asked Questions
Net Stable Funding Ratio (NSFR)
The net stable funding ratio (NSFR) required by EU regulation directly applicable in all Member States requires stable funding of credit institutions over a 1-year period. The regulation, which focuses on long-term liquidity risks, encourages credit institutions to finance their assets over a sufficiently long period of time and in a stable structure, and prevents excessive maturity mismatches between assets and liabilities.
The ratio gives weights for liabilities and own funds depending on stability and expected renewal, while for assets and off-balance sheet items it gives weights based on liquidity, encumbrance and probability of drawdown, on the basis of which the Available Stable Funding (ASF) and Required Stable Funding (RSF) is determined. The ratio of these two aggregates, the NSFR, should reach at least 100 per cent, i.e., institutions should have sufficient stable funds to meet their financing needs under normal and stress conditions over a one-year time horizon.
Based on EU legislation, the NSFR is expected to be met at a minimum level of 100 percent from 28 June 2021. The regulations must be complied with both on a consolidated and individual level.
Calculation of Net Stable Funding Ratio