European Banking Authority Publishes Further Criteria on Preferential Treatment for Calculating the Liquidity Coverage Requirement for Intra-group Liquidity Flows

The European Banking Authority published final draft Regulatory Technical Standards on the criteria for the application of preferential treatment in cross-border intragroup credit or liquidity lines, or within an institutional protection scheme. The Capital Requirements Regulation permits regulators to grant preferential treatment for transactions within a group or an institutional protection scheme by applying higher inflow rates (in the case of the liquidity receiver) or lower outflow rates (in the case of the liquidity provider) for calculating  the liquidity coverage requirement for intra-group liquidity flows. Where transactions within a group or an institutional protection scheme constitute cross-border positions, preferential treatment is conditional upon compliance with additional objective criteria specified in the Liquidity Coverage Ratio Delegated Act. The Capital Requirements Regulation mandates the EBA to develop draft RTS to specify additional objective criteria. 

The first criterion of the Liquidity Coverage Ratio Delegated Act requires the liquidity provider and receiver to present a low liquidity risk profile. The draft RTS further requires a liquidity provider and receiver to have complied with the required level of liquidity coverage ratio specified in the Liquidity Coverage Ratio Delegated Act and other applicable liquidity-related supervisory requirements or measures specified in the Capital Requirements Directive on an on-going basis for at least 12 months prior to the authorization of preferential treatment. Additionally, the liquidity provider and receiver's liquidity positions must pose a low level of risk according to the latest supervisory review and evaluation processed under the applicable provisions of the Capital Requirements Directive.

The second criterion under the Liquidity Coverage Ratio Delegated Act requires that there are legally binding agreements and commitments between group entities regarding the credit or liquidity line. The draft RTS requires the legally binding agreements to satisfy certain conditions, including that the credit or liquidity line is a committed line which is legally and practically available at any time for the duration of the facility on a cross-border basis, and that the currency denomination of the committed credit or liquidity line is consistent with the distribution by currency of the net liquidity outflows of the liquidity receiver that are unrelated to the line.

The third criterion stipulates that the liquidity risk profile of the liquidity receiver has been adequately taken into account in the liquidity risk management of the liquidity provider. The draft RTS further specifies that this condition will be satisfied if a number of other requirements are met, including that the liquidity provider monitors and oversees the liquidity receiver on a daily basis, and that the effects of the preferential outflow or inflow rate are fully considered and integrated into the contingency funding plans of the liquidity provider and the liquidity receiver.

View the EBA update.

View the final draft RTS.