The Liquidity Coverage Ratio (LCR) was introduced to promote the short-term resilience of the liquidity risk profile of banks, requiring them to hold a large enough stock of high quality liquid assets (HQLA) to meet their payment obligations in the case of severe short-term stress. BoE/PRA were concerned that banks are reluctant to draw on their HQLA in periods of unusual liquidity pressures, so the Discussion Paper sought views on the issues surrounding HQLA usability.
The Feedback Statement does not include policy proposals, nor signal how PRA is considering supporting banks in prudently using their HQLA when facing liquidity pressures. Rather, it aims to improve understanding of why and to what extent banks are reluctant to draw on their stock of HQLA when facing liquidity pressures, and how HQLA usability could be improved.
Key concerns from respondents were:
- Regulatory reactions to initial falls in LCRs, such as more intensive supervisory oversight and heightened regulatory reporting;
- Lack of regulatory views on the amount of time appropriate to rebuilt HQLA buffers following a drawdown; and
- Allowing LCRs to fall would be perceived by the market as a signal that a bank is experiencing liquidity stress.
There were a range of views on how BoE/PRA might improve HQLA usability. Respondent suggestions included:
- Future regulatory communications in a liquidity stress should clarify the extent to which LCRs can fall and the time banks have to rebuild their stocks of HQLA subsequently;
- Possible adjustments to how the LCR is calculated in stress:
- adjusting the LCR’s calibration and design to reduce expected liquidity outflows in the LCR stress;
- expanding the range of assets eligible as HQLA;
- PRA Rulebook should codify explicitly defined reductions in liquidity requirements in a stress;
- Policy recommendations should form part of a ‘liquidity stress playbook’, in which pre-defined adjustments to the regulatory framework would be triggered in a market disruption;
- Simplifications to liquidity-related disclosures in a liquidity stress;
- Recalibrations of the LCR to account for pro-cyclicality;
- Increased harmony between regulatory guidance and supervisory action; and
- Greater international coordination to avoid conflicting regulatory guidance in different jurisdictions.