The liquidity coverage ratio of EU banks declined in the first half of 2022 but is still well above the minimum requirement

The EU’s existing liquidity coverage requirements are monitored and evaluated in the EBA’s report on liquidity measures: In June 2022, the liquidity coverage ratio (LCR) dropped to 166%. Because of higher interest rates and increased volatility, there was a rise in outflows, which contributed to the reduction in asset prices in the first half of the year. Given the hazy economic outlook, high levels of inflation, and the process of normalizing monetary policy, the evolution of banks‘ LCR levels is very important. In order to prevent overexposure to fluctuations in the foreign exchange markets, EU banks must be closely monitored by banks and supervisors because they have considerably lower liquidity buffers in foreign currencies, particularly the USD.
In 2022, the EU central banks began the process of normalizing the liquidity-enhancing monetary policy measures, and it is anticipated that this process will continue in the ensuing years. The run off of securities accumulated by EU central banks in the asset purchase programs will continue, and this will have the effect of reducing liquidity in the EU financial system moving forward. In particular, the majority of the ECB’s Targeted Longer-Term Refinancing Operations (TLTRO-3) operations will mature in 2023. In this context, it is essential to continue keeping an eye on how the LCR levels of the banks are changing.
In addition, this report contains evaluations that assess the impact of the LCR on bank lending and the interactions between the LCR and the Net Stable Funding Ratio (NSFR) metrics.