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12 March 2014

EBIC position paper on liquidity and on the forthcoming EC delegated act

EBIC welcomes the Commission's efforts to strengthen financial stability through the development of different regulatory initiatives. However, going further in some of the initiatives planned, in particular with regards to liquidity, could have opposite effects to the ones sought.

EBIC would like to welcome the efforts of the European Commission to strengthen financial stability by the development of the different regulatory initiatives aimed at addressing the major flaws observed in the European banking system during the crisis. However, EBIC is also of the opinion that much has already been done and that these regulatory initiatives should be more than enough to achieve the objectives sought. EBIC believes that going further in some of the initiatives planned, in particular with regards to liquidity, could have opposite effects to the ones sought. Indeed, EBIC deems that a contradiction between some of the objectives of the European Commission policy targets could exist; for instance, by strengthening the prudential requirements on liquidity, the provision of lending will be significantly reduced at a time when lending provision is especially weak. Generally speaking, EBIC considers the timing of the introduction challenging, due to the difficulties of the economy and, in particular, the shortage of credit to the real economy and specifically to SMEs.

Furthermore, EBIC would like to stress the contradiction that entails that the European Commission is promoting alternatives to the banking intermediation model to boost lending to the real economy through the development of capital markets and the extension of securitisation activities, whilst simultaneously hindering the use of these instruments by strengthening the prudential requirements, in particular with regards to liquidity. It would be good to acknowledge that banks are the main players in the provision of credit to SMEs and to the whole economy. In addition it should be avoided that the non-recognition of intra-network liquidity (within banking networks) leads to a reduction of banks’ credit supply. EBIC would also like to emphasise that instruments such as Asset Backed Securities (ABS) and covered bonds are the ones that are more closely linked to the real economy and therefore they should be more in use, not less.

After the presentation of the two EBA reports on liquidity the European Commission now has the task to develop the delegated act which will include the final binding rules on liquidity requirements. Given that the introduction of the liquidity rules is already impacting the economy and will further hinder it, EBIC strongly advises the Commission to take into account alternatives to the current formulation expressed by the EBA, such as a further phase in period. This is particularly relevant currently, as financial institutions are accelerating the deleveraging process and a renewed LTRO has not been scheduled. Alternatively, regulators should strongly consider the possibility of broadening the list of liquid assets eligible for the Level 1 and Level 2 including all those assets eligible for ECB refinancing operations, specifically those more linked to the real economy such as credit claims and retained RMBS. For example, a temporal way that gradually adapts to the impact of the liquidity rules combined with the deleveraging process could be used. Another alternative to lessen the impact of the introduction of the liquidity rules would be having a proportionate application of them; for instance a cap (1/3) on the additional HQLA should be included in the LCR so as to avoid further impact.

Position paper


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