They urged the EC to defer the inclusion of binding minimum liquidity ratios in European prudential legislation at this moment. It should, however, lay down principles and define the reporting process to allow the observation periods to be fully used to design an appropriate liquidity regulation.
Whilst the Commission has found broad support to put in place measures to overcome the financial crisis and to prevent any repeat in the future, the pace of this regulatory reform is such that unintended consequences cannot be ruled out arising from the piecemeal focus placed on individual components up to now. They believe it may be still opportune to pause and reflect on the totality of measures proposed and understand how they will interact, including on the growth capacity of the real economies of the EU. Carrying out a cumulative impact assessment in this context would therefore be highly necessary.
One set of such measures that is currently being considered in the EU is the liquidity standards, which in their objective are to be supported but their methodology and calibration have not reached a point of maturity. G20 Leaders accepted as much when they agreed to the proposed observation periods, which should be fully used and explored before a legally binding solution is arrived at for the EU.
The two liquidity ratios as presently proposed by the Basel Committee on Banking Supervision (BCBS) aim to avoid in future a significant credit contraction in difficult economic times, but have been recognised ceteris paribus to lead to substantial liquidity and funding shortfalls. The Committee of European Banking Supervisors (CEBS) has calculated these gaps to be in the order of €1.8 trillion (long-term funding) and €1 trillion (short-term liquidity) for Europe, amounting to approximately 15% and 8% of EU GDP, respectively. Considering the main role played by European banks in credit transformation, and the fact that European companies depend highly on bank lending (75% vs. 25% in the US for instance), this will have a significant effect on the European economy.
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