Liquidity and Funding

Liquidity and Funding

The key role that banks undertake for society is to take deposits, make loans and transform maturity, by borrowing short and lending long. Maturity transformation exposes banks to liquidity risk.

To mitigate liquidity risk deposit takers are required to hold sufficient regulatory liquidity to ensure they can meet both expected and unexpected cash flows and collateral needs without adversely affecting either daily operations or the financial condition of the bank during a period of short-term liquidity stress. This could give rise to a run on the bank if customers decide to withdraw their deposits all at once. This regulatory liquidity takes the form of High-Quality Liquid Assets (HQLAs) such as cash, government bonds or other high quality debt securities that can readily be converted into cash without significant loss of value.

Banks must meet quantitative regulatory liquidity requirement at all times. These are the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR).

The LCR requires a bank to at all times to hold sufficient HQLAs to cover net cash outflows during a 30-day liquidity stress scenario.

The NSFR requires banks to limit reliance on short-term funding by requiring them to have sufficient stable funding to cover assets and off-balance-sheet activities that require funding over the next 12 months.

UK Finance also works with members policy matters relating funding instruments such as securitisations, covered bonds and Additional Tier One and Tier 2 capital.

For more information on the team’s work in bank capital contact either:

simon.hills@ukfinance.org.uk

or

nala.worsfold@ukfinance.org.uk

Area of expertise: