Shearman & Sterling LLP | FinReg | European Central Bank Issues Statement on Liquidity of Euro Area Banks
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  • European Central Bank Issues Statement on Liquidity of Euro Area Banks

    The European Central Bank has issued a statement on the results of its 2019 supervisory stress test. The European Central Bank is responsible for direct prudential supervision of certain significant banks based in the Eurozone as part of the Single Supervisory Mechanism. It found that the vast majority of banks directly supervised by the ECB have overall comfortable liquidity positions, although there were some vulnerabilities that required further attention. A total of 103 banks took part in the exercise, around half of which reported that they would be able to continue operating using available cash and collateral without recourse to funding markets of more than six months under an adverse shock and more than four months under an extreme shock.
    The ECB will require banks to follow up on the following vulnerable areas:
    • Survival periods calculated on the basis of cash flows in foreign currencies, which were often shorter than cashflows reported at the consolidated level;
    • Subsidiaries of euro area banks domiciled outside the euro area, as these typically displayed shorter survival periods and may rely on intragroup funding which could expose banks to ring-fencing risk in foreign jurisdictions;
    • Certain regulatory optimization strategies;
    • Collateral management practices, which would benefit from further improvement in some banks; and
    • Understanding of the negative impact of a credit rating downgrade on liquidity.
    The ECB confirms that the results will not directly affect supervisory capital requirements, but will inform the assessment of banks’ governance and liquidity risk management.
    View the ECB's statement.
    View the results of the ECB's Sensitivity Analysis of Liquidity Risk.
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