LiST19, the ECB's liquidity stress test exercise, is well underway. We believe that many institutions remain uncertain how to interpret the methodology and complete the required templates. Banks should also realise that this relatively narrow process could have wider implications for future stress tests and for other liquidity-related supervision - including ILAAP.
On 6 February the ECB launched the Liquidity Stress Test for 2019 (LiST19). It reflects, among other factors, concerns about the potential impact of capital markets volatility on funding and banking stability. When LiST19 was first announced in October 2018 as the chosen stress test of the year, we discussed how banks could prepare for the exercise. Now the question remains, what will be the impact of the exercise?
LiST19 will test the liquidity resilience of banks under the ECB's direct supervision, with a particular focus on their ability to withstand idiosyncratic funding shocks. This focused approach is parallel to the ECB sensitivity analysis of Interest Rate Risk in the Banking Book (IRRBB) stress test exercise of 2017, when the ECB tested banks' exposure to hypothetical interest rate shocks. Further, the LiST19 exercise will concentrate on calculating banks' anticipated “survival period” in the event of being denied access to conventional inter-bank funding.
For banks, LiST19 is primarily a data-fulfilment exercise. They need to complete complex spreadsheets, both at a consolidated level and with deep dives into other areas. The maturity ladder template provides the cornerstone, supplemented by currency, intragroup, collateral mobilisation and additional memo items templates. The initial deadline for submission of these templates was mid-March, however additional submissions may also be required if the ECB makes further requests for information. After submission, the ECB will:
It is anticipated that the ECB will not disclose individual bank's results but that banks will discuss these as part of the Supervisory Review and Evaluation Process (SREP) dialogue later in 2019. The results of this exercise will also feed into the ECB's ongoing supervisory assessments of banks' liquidity risk management frameworks. The outcome of the stress tests will not affect supervisory capital or liquidity requirements in a mechanical way. However, the outcomes may give rise to additional liquidity requirements and to supervisory requests to strengthen specific maturity buckets so as to improve the overall resilience of individual banks. In addition, results of LiST19 may provide the ECB further information on banks' stress test framework as well as on their range of practice for model risk management, that may enable the ECB to enhance its SREP methodology.
In light of the above, KPMG recently conducted a survey of 18 global domestically and systemically important banks across eight EU member states. The findings show a number of uncertainties over how to interpret the LiST19 methodology and complete the required templates. That's especially true for areas that aren't usually required for supervisory reporting. The forecasting and modelling of liquidity over different time horizons is one example. In addition, as there is a dependency on various functions to complete the required templates, data quality and data availability remain a concern for some banks.
The survey and our market experience confirm our view that LiST19 could have much broader implications for many banks. For example:
LiST19 may not be as demanding as previous stress tests, but it poses clear challenges in a number of areas. Banks should also understand that its effects, while not yet fully clear, will continue to be felt long after they have submitted their templates.