The Bank of England (BoE) published a summary of responses to the discussion paper (DP), “The prudential liquidity framework: Supporting liquid asset usability’”.
In response to the global financial crisis, the Liquidity Coverage Ratio (LCR) was introduced to promote the short-term resilience of the liquidity risk profile of banks. Also, the central bank stands ready to use its balance sheet to provide liquidity insurance as appropriate.
Most respondents agreed with the evidence presented in the DP that banks are reluctant to draw on their stock of HQLA in periods of unusual liquidity pressures. Most respondents commented that banks are concerned about regulatory reactions to initial falls in their LCRs, with such reactions including more intensive supervisory oversight and heightened regulatory reporting. Many respondents also mentioned concerns about regulatory views on the amount of time that is appropriate to rebuild HQLA buffers following a drawdown. In addition, most respondents noted that banks allowing LCRs to fall would be perceived by the market as a signal that a bank is experiencing a liquidity stress.
There was a range of views on how the Bank and the Prudential Regulation Authority (PRA) could improve HQLA usability. The majority of respondents suggested that future regulatory communications in a liquidity stress should clarify the extent to which LCRs can fall and the time banks have to rebuild their stocks of HQLA subsequent to such falls. Many respondents suggested possible adjustments to how the LCR is calculated in stress, for example, adjusting the LCR’s calibration and design to reduce expected liquidity outflows in the LCR stress, and expanding the range of assets eligible as HQLA.
Some respondents recommended that regulators codify in the PRA Rulebook explicitly defined reductions in liquidity requirements in a stress. Some respondents proposed these policy recommendations as part of a “liquidity stress playbook”, in which pre-defined adjustments to the liquidity regulatory framework would be triggered in a market disruption.
Many respondents suggested simplifications to liquidity-related disclosures in a liquidity stress, as well as recalibrations of the LCR to account for pro-cyclicality in the metric. Many respondents also emphasized that harmony between regulatory guidance and supervisory actions is required to positively impact HQLA usability. Lastly, the majority of respondents advocated greater international coordination to avoid conflicting regulatory guidance in different jurisdictions.