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However, within this review period there were important fluctuations in the components of the ratio, driven mostly by changes in the banks’ allocation of funding deposits and the ongoing reduction of central bank liquidity. Unlike the LCR in domestic currency, EU banks’ LCR in foreign currencies remained below 100%.
The European Banking Authority (EBA) today published its Report on liquidity measures, which monitors and evaluates the liquidity coverage requirements currently in place in the EU. Between June 2022 and June 2023, the EU banks’ liquidity coverage ratio (LCR) declined but remained comfortably above the minimum requirement. However, within this review period there were important fluctuations in the components of the ratio, driven mostly by changes in the banks’ allocation of funding deposits and the ongoing reduction of central bank liquidity. Unlike the LCR in domestic currency, EU banks’ LCR in foreign currencies remained below 100%.
EU banks’ LCR buffers remain meaningfully higher than the minimum requirement. However, during the review period from June 2022 to June 2023, EU banks’ LCR showed a decline of 3 percentage points and ended up at a level of 163%, as of June 2023. This relatively moderate decline on a year-on-year basis masks some important developments in the underlying components of the ratio. In the fall of 2022, there was a marked decline in the net outflows (the denominator of the LCR) that was only partly offset by a decline in High-Quality Liquid Assets (HQLAs), the nominator of the LCR. This decline in net outflows is mostly explained by banks shifting retail deposits to categories that are exempted from the calculation of the outflows, while the decline in HQLAs mostly reflected the gradual reduction in excess liquidity by several EU central banks. In the first half of 2023 the HQLAs continued to decline with a temporary acceleration in March following the turmoil in the global banking markets, while the net outflows remained stable. Within the sample of institutions, large banks saw their LCR declining while small and medium-sized banks increased their ratios.
The ongoing reduction of central bank liquidity has a negative impact on EU banks’ LCRs. In addition to the impact that resulted from the gradual unwinding of the asset purchase programmes by the ECB and the Swedish Riksbank, banks in the euro area repaid EUR 337bn of the targeted longer-term refinancing operations (TLTRO) loans in June 2023. These repayments resulted in a drop in the LCR by -3.55 percentage points for the affected banks on average. The decline in liquid assets for banks with TLTRO funds was two times higher than for the banks with no such liabilities. At the end of June 2023, euro area banks reported EUR 438bn of remaining TLTRO balances. ...
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