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DNB updates its approach regarding Pillar II liquidity requirements for LSIs
Due to the implementation of the Net Stable Funding Requirement (NSFR) in European legislation, DNB has reviewed its 2017 methodology for determining Pillar II liquidity requirements for LSIs. The revised approach will become applicable in the 2021 Supervisory Review and Evaluation Process (SREP) cycle.
As of 28 June 2021, the amended Capital Requirement Regulation (CRR) requires all institutions to maintain a minimum net stable funding ratio (“NSFR”) of 100%, thereby ensuring the stability of the institution’s funding profile. Anticipating the implementation of the NSFR, DNB already introduced this requirement in 2017 under Pillar II. From 2021 onwards, this NSFR-requirement will no longer be part of the Pillar II requirements as it is part of the CRR Pillar I requirements.
In 2017, DNB also introduced a survival period of six months. DNB expects an LSI to calculate and monitor its survival period at least on a monthly basis and should be notified by an LSI in case its survival period drops below 7 months. As this survival period is not implemented in EU legislation, the survival period will remain a Pillar II liquidity requirement for LSIs.
The survival period requirement entails that a credit institution needs to ensure it can continue operating for a minimum period of 6 months and meet all its payments due under the assumed liquidity stress scenarios. This requirement is based on the outcome of the internal stress test of the credit institution, that should capture the vulnerabilities of the specific institution. Responsive actions taken by the management are to be incorporated in the stress if applicable (“dynamic balance sheet assumption”).
The stress test and survival horizon calculations should be in line with the EBA guidelines on liquidity risk stress testing (EBA/GL/2018/04). According to these EBA guidelines, credit institutions have to apply three types of stress scenarios: an idiosyncratic scenario, a market-wide scenario, and a combination of these two scenarios. Credit institutions should furthermore design different time horizons in their stress testing, which should range from intraday and overnight up to at least 12 months. Credit institutions are expected to meet the 6 month survival period requirement in all three types of stress scenarios.