EU banks’ liquidity coverage ratio declined but remains well above the minimum requirement

EBA published its Report on liquidity measures, assessing liquidity coverage requirements in the EU. The report covers the period between June 2022 and June 2023, revealing a decline in the EU banks‘ LCR. While the LCR remained comfortably above the minimum requirement, it experienced a 3-percentage-point drop, ending at 163% as of June 2023. This decrease was attributed to fluctuations in the components of the ratio, driven by changes in banks‘ funding deposits and the gradual reduction of central bank liquidity.
Notably, the decline in net outflows, a component of the LCR, was partly offset by a decrease in HQLAs. Banks shifted retail deposits to exempt categories, mitigating net outflows, while the reduction in HQLAs reflected the gradual decrease in excess liquidity by several EU central banks. Large banks saw their LCR decline, whereas small and medium-sized banks increased their ratios.
The reduction of central bank liquidity, influenced by unwinding asset purchase programs and TLTRO repayments, had a negative impact on EU banks‘ LCRs. The report highlighted a drop in the LCR by -3.55 percentage points for affected banks on average. Additionally, EU banks continued to hold lower liquidity buffers in foreign currencies, with the LCR in USD improving slightly but remaining below 100%, while the LCR in GBP deteriorated.
The report emphasized the need for banks and competent authorities to monitor foreign currency LCRs to prevent risks during volatile market conditions. Despite the decline in LCR, the buffers remained higher than the minimum requirement, but the ongoing reduction of central bank liquidity posed challenges. The report also assessed the impact of LCR on banks‘ lending activities and provided detailed analysis of central bank liquidity reduction effects on the LCR.