Euro area banks have overall comfortable liquidity positions, but some vulnerabilities require further attention, ECB finds

07 October 2019

The vast majority of banks directly supervised by the European Central Bank have overall comfortable liquidity positions despite some vulnerabilities requiring further attention, according to the results of the 2019 supervisory stress test.

The shocks simulated in the exercise were calibrated on the basis of supervisory experience gained in recent crisis episodes, without any reference to monetary policy decisions. The sensitivity analysis focussed solely on the potential impact of idiosyncratic liquidity shocks on individual banks. It did not assess the potential causes of these shocks or the impact of wider market turbulence.

The results of the exercise are broadly positive: about half of the 103 banks that took part in the exercise reported a “survival period” of more than six months under an adverse shock and more than four months under an extreme shock. The “survival period” is defined as the number of days a bank can continue to operate using available cash and collateral without access to funding markets.

The six-month time horizon exceeds the period covered by the liquidity coverage ratio, which requires banks to hold a sufficient reserve of high-quality liquid assets to allow them to survive a period of significant liquidity stress lasting 30 calendar days. Long survival periods under the severe shocks envisaged by the exercise would leave banks significant time to deploy their contingency funding plans.

Euro area subsidiaries of significant institutions as well as banks undergoing mergers or restructuring were excluded from the sample.

Universal banks and global systemically important banks would generally be affected more severely than others by idiosyncratic liquidity shocks as they typically rely on less stable funding sources – such as wholesale and corporate deposits, which were subject to higher outflow rates in the exercise. Retail banks would be affected less strongly, given their more stable deposit base.

Based on the findings of the exercise, the ECB will require banks to follow up mainly in the following areas where vulnerabilities were identified:

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