EU banks’ liquidity coverage ratio increased in June 2024, underpinned by growth in banks’ holdings of liquid assets

The European Banking Authority (EBA) today published a Report on liquidity measures, which monitors and evaluates the liquidity coverage requirements currently in place in the EU. Between June 2023 and June 2024, EU banks’ liquidity coverage ratio (LCR) increased by 3 percentage points to reach 167%. Within that period, we observed changes in the composition of banks’ funding deposits while banks’ holdings of liquid assets steadily increased. EU banks’ average LCR in USD and in GBP improved during the period under review, to exceed 100% as of June 2024.

EU banks’ LCR buffers remain comfortably above the minimum requirement. In the second half of 2023 the average LCR increased sharply due to a marked decline in the net outflows (the denominator of the LCR) and a simultaneous increase of High-Quality Liquid Assets (HQLAs) (the nominator of the LCR). The observed decline in net outflows is mostly explained the shifting of retail deposits to categories that are exempted from the calculation of the outflows. This move reversed in the first half of 2024, when net outflows increased by more than HQLAs and the average LCR declined. The increase in net outflows is explained by a drop in deposits exempted from the calculation of outflows which was not fully offset by the increase in outflows from other categories.

The composition of EU banks’ liquidity buffer has changed in June 2024 compared to June 2023. The increase in Level 1 securities, mainly sovereign bonds, exceeded the decline in Level 1 cash and central bank reserves. As a result, HQLAs increased in the period from June 2023 to June 2024.

The reduction in Level 1 cash and central bank reserves occurred for all banks. However, banks in the euro area that repaid targeted longer-term refinancing operations (TLTRO) loans in the first half of 2024 reported sharper declines. These repayments resulted in a drop in the LCR by -4 percentage points for the affected banks on average, while banks with no such liabilities increased their LCR by 0.64 p.p. on average. At the end of June 2024, euro area banks reported EUR 197bn of remaining TLTRO balances.

As it has been the case in previous years, EU banks continue to hold lower liquidity buffers in foreign currencies. The LCR in US dollar improved during the period of review from June 2023 to June 2024. Over the same period, the LCR in GBP also improved for the total sample (but declined for the common sample of banks reporting positions in GBP at all reference dates). The ability of banks to access the market for currency swaps may become constrained during periods of stress. Therefore, banks and competent authorities need to pay attention to any shortfalls in foreign currency LCRs to avoid unforeseen liquidity mismatches during volatile market conditions.

Finally, the Report also includes an assessment of the impact of the LCR on the banks’ lending activities. It also assesses the effect of deposits exempted from the calculation of the outflows on banks’ LCR, the impact of TLTRO repayments made between June 2023 and June 2024 on the liquidity profile of euro area banks, and the impact of the ongoing reduction of central bank liquidity on central bank assets and exposures over time.

Note to the editors

1. This Report has been drafted in accordance with Article 509(1) of the Capital Requirements Regulation (CRR).
2. Article 412(1) of the Capital Requirements Regulation (CRR) foresees the possibility of monetising liquid assets during times of stress (resulting in an LCR below 100%), as maintaining the LCR at 100% under such circumstances could produce undue negative effects on the credit institution and other market participants.
3. The CRR does not foresee a minimum requirement for LCR in foreign currencies. However, article 8(6) of the LCR Delegated Regulation requires banks to ensure that the currency denomination of their liquid assets is consistent with the distribution by currency of their net liquidity outflows. The same article also includes a discretion to competent authorities to require credit institutions to restrict currency mismatches by setting limits on the proportion of net liquidity outflows in a currency that can be met during a stress period and by holding liquid assets not denominated in that currency.
4. The results of the Report on liquidity measures are presented separately for G-SIIs, O-SIIs and “other banks” (non G-SIIs or O-SIIs). Some figures are presented by country.