Quantitative liquidity requirements

Capital Requirements Regulation (CRR)

The rules governing quantitative liquidity supervision are set out in the Capital Requirements Regulation (CRR), which transposes the Basel III framework’s liquidity ratios – the liquidity coverage ratio (LCR) and the net stable funding ratio (NSFR) – into directly applicable law for credit institutions. These rules apply to all CRR credit institutions falling within the scope of Article 6(4) of the CRR. They also apply to all institutions that are required to be treated in the same way as CRR institutions under section 1a of the German Banking Act (Kreditwesengesetz – KWG).

The CRR sets out a reporting requirement for the LCR that was used as the basis for the European definition of this ratio in the European Commission’s Delegated Regulation. This Delegated Regulation was adopted by the Commission on 10 October 2014. As a result, the LCR took effect in the European Union on 1 October 2015; the mandatory minimum coverage requirement is 100%.

The LCR is designed to ensure that institutions have sufficiently large liquidity buffers to survive a combined scenario comprising both institution-specific and systemic stress events for 30 days.

Regulation 2019/876 amending Regulation (EU) No 575/2013 (CRR II), which introduced the NSFR, came into force on 28 June 2021; it prescribes a mandatory minimum coverage requirement of 100%.

The NSFR ensures that institutions have appropriate levels of stable funding. This prevents excessive maturity transformation and in particular dependence on short-term wholesale funding, which makes institutions vulnerable to stress and which proved to be a major problem during the financial crisis.

Article 4(1) No. 145 of the CRR II also introduces the concept of “small and non-complex institutions“ (SNCIs). Under Article 428ai of the CRR II, SNCIs can apply to their competent authority for permission to comply with and report a simplified NSFR (sNSFR) rather than the full NSFR. Conceptually, the sNSFR is comparable to the full NSFR. It requires stable funding to have been put in place for assets, based on the degree of illiquidity concerned, and thus limits extreme maturity transformation. However, one significant difference between the sNSFR and the full NSFR is the substantially simpler reporting required under the former.

Above and beyond the LCR and the NSFR, the CRR requires institutions to report additional liquidity monitoring metrics, or AMMs (Article 415(3)(b)). The additional metrics that institutions have to report under the Regulation are designed to provide a more comprehensive overview of the institutions’ liquidity position and also to serve as an early warning mechanism.

The AMMs comprise reports on the

• concentration of funding by counterparty
• concentration of funding by product type
• prices for various lengths of funding,
• roll-over of funding, and
• concentration of counterbalancing capacity by issuer/counterparty.

The German Liquidity Regulation (Liquiditätsverordnung – LiqV) is only binding on those credit institutions that have been exempted from the liquidity requirements set out in Part 6 of the CRR. In Germany, this relates to housing enterprises with savings schemes and guarantee banks.

Investment firms are bound by the separate liquidity requirements set out in Regulation (EU) 2019/2033 and the German Act Implementing Regulation (EU) 2019/2034 (Gesetz zur Umsetzung der Richtlinie (EU) 2019/2034). Under this legislation, large investment firms are treated like CRR credit institutions, and therefore have to comply with the liquidity requirements set out in the CRR.

Qualitative liquidity requirements

German Banking Act

Section 25a (1) of the KWG requires institutions to have in place a proper business organisation which ensures compliance with the relevant legal provisions and with business requirements. Appropriate and effective risk management, on the basis of which an institution shall continuously safeguard its internal capital adequacy, is an integral part of such a proper business organisation.

Minimum Requirements for Risk Management
(Mindestanforderungen an das Risikomanagement – MaRisk)

In addition to complying with a quantitative liquidity standard, institutions are obliged to observe qualitative liquidity risk management requirements. The “Minimum Requirements for Risk Management” (BaFin - Rundschreiben - Rundschreiben 06/2024 (BA) - MaRisk BA) specify the qualitative requirements set out in section 25a of the KWG in greater detail. The MaRisk requires institutions to ensure that they can meet their payment obligations at all times.

The BTR 3.1 module of the MaRisk describes the general requirements that must be observed by all institutions. Among other things, these comprise drawing up liquidity overviews, conducting appropriate stress tests, developing contingency plans and factoring in liquidity cost and benefit considerations into the management of their business activities.

Capital market-oriented institutions are subject to stricter requirements. The BTR 3.2 module also requires them to maintain a sufficient liquidity reserve to ensure they can bridge their liquidity needs with highly liquid assets for at least one week, and with other assets for at least one month.