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The 2019 ECB stress test

Liquidity resilience: The 2019 ECB Stress Test

LiST19, the ECB's liquidity stress test exercise, which started in February, is well underway. 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 2019, 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 interest rate shocks. The LiST19 exercise will assess banks’ vulnerability to liquidity shocks based on a range of hypothetical adverse scenarios and will concentrate on calculating banks' anticipated “survival period” and LCR (Liquidity Coverage Ratio) forecasting.

For banks, LiST19 is not only a data-fulfilment exercise, but also a complex organisational exercise requiring various departments and data sets to be aligned. Banks 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 item templates. The initial deadline for submission of these templates was mid-March, however additional re-submissions will also be required if the ECB makes further requests for information. After the first submissions, the ECB will conduct a Quality Assurance review, including a review of data quality and of consistency between LiST19 templates, Liquidity Coverage Ratio (LCR) reporting and the C66 template of COREP1.

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 the overall resilience of individual banks.

Our market insights have confirmed that LiST19 could have much broader implications for many banks. For example:

  • LiST19 may not directly affect Pillar II capital requirements, but it will shape the ECB's view of each institution's relative vulnerabilities as well as feeding into ongoing assessments of banks' liquidity risk management frameworks.
  • The request for numerous data points not specified by formal regulatory standards could be a sign of things to come in future stress tests. This underlines the increasing importance of flexible technology and data infrastructures to meet evolving supervisory requirements. Further, it is important for banks to reconcile different data points and understand differences and common ground across different reports.
  • LiST19 results could affect the ECB's future approach to ILAAP (the Internal Liquidity Adequacy Assessment Process) – in particular the calibration of quantitative results. In addition, the prioritisation of specific on-site inspections may be impacted by this exercise.
  • Finally, the outcomes of LiST19 may trigger banks to review and enhance their liquidity stress test framework as well as their broader liquidity management framework after they have analysed the differences and the common ground with their ILAAP.

In a nutshell, LiST19 poses clear challenges in a number of areas. Banks should understand that its effects, while not yet fully clear, will continue to be felt long after they have submitted their templates.

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