The European liquidity standards are defined by the following legal acts: The most relevant of these monitoring tools is the Maturity Ladder (table C66.00) that provides a comprehensive overview of the balance sheet items and of some selected off balance sheet items per residual maturity. These tools are used for the ongoing monitoring of the liquidity risk exposures of financial institutions. In addition to the LCR and NSFR standards, a set of liquidity risk monitoring tools exist to measure other dimensions of a bank’s liquidity and funding risk profile.The NSFR supplements the LCR by creating an additional incentive for banks to fund their activities with more stable sources of funding and entered into force on 28 June 2021. Financial institutions are required on an ongoing basis to raise stable funding (equity and liability financing expected to remain stable over a one-year time horizon) at least equal to their stable assets or illiquid assets which cannot be easily turned into cash over the following 12 months. It promotes a sustainable maturity structure of assets and liabilities to ensure the resilience of financial institutions over a longer time horizon of one year. The second standard is the Net Stable Funding Requirement (NSFR).This requirement is applicable since 2015. The LCR improves the banking sector’s ability to absorb shocks arising from financial and/or economic stresses, thus reducing the risk of spillover. Net cash outflows are to be computed on the basis of a number of assumptions concerning run-off and draw-down rates. Financial institutions are required to hold at all times liquid assets, the total value of which equals, or is greater than, the net liquidity outflows which might be experienced under stressed conditions over a short period of time (30 days). ![]() It promotes the short-term resilience of a bank’s liquidity risk profile by ensuring that it has sufficient high-quality liquid assets (HQLA) to survive a significant stress scenario lasting for 30 days. The first standard is the liquidity coverage ratio (LCR).These funding and liquidity standards are designed to achieve two separate but complementary objectives: Additionally, congressional legislation has been introduced that would treat certain municipal securities as HQLA for the purpose of LCR requirements.Two liquidity standards have been adopted in the European Union to ensure that financial institutions are stable and are completed by a set of monitoring tools. ![]() Municipal securities are not currently considered HQLA, but a proposed rule by the FRB would include some uninsured investment-grade general obligation municipal securities as HQLA. The LCR requirements differ based on the dollar amount of assets under control by the institution with more HQLA holdings required of larger institutions. The Federal Reserve Board (FRB), Office of the Comptroller of Currency (OCC), and Federal Deposit Insurance Corporation (FDIC) established a Liquidity Coverage Ratio (LCR) that requires banking institutions with assets over $10 billion to have an adequate stock of high-quality liquid assets (HQLA) to meet liquidity needs over a short period of time. Basel III is an international, voluntary regulatory framework developed to respond to the deficiencies in regulation that contributed to the recent financial crisis and addresses banks’ capital requirements, liquidity coverage, and leverage.
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