STRICTER FUNDING rules and more prescriptive stress tests are among the possibilities being considered by the Central Bank to enhance the management of liquidity risk among credit institutions.
In a discussion paper published yesterday, the bank said a new regulatory liquidity framework would entail “some costs” for the Irish banking system.
However, it said the benefits would exceed the costs, and “should be an objective that both industry and regulator can share”.
The paper highlights numerous issues under consideration, such as the importance of ensuring that banks have an adequately diversified funding structure.
One approach being considered is the imposition of industry-wide regulatory ratios or limits. For instance, a bank could be required not to owe more than 15 per cent of total deposits to any one depositor, or that its 10 largest deposits cannot exceed 50 per cent of the total deposits.
However, it conceded that because of the variety of business and ownership models in the industry, such a prescriptive approach might be “inappropriate”.
The regulatory authority has called for submissions from the industry and the public on this and other issues, and this feedback will enable it to draw up a consultation paper. The timing of the new liquidity requirements depends on the outcome of a proposed European Commission directive in this area.
The Central Bank is also considering taking a more prescriptive approach when setting out the responsibilities of boards of directors in the area of governing liquidity risk.
For example, the board could be required to undertake regular reviews of the internal controls relating to liquidity management.
Furthermore, it is looking at the possibility of setting more specific requirements in relation to liquidity stress tests, such as prescribing minimum tests.
The Central Bank is reviewing its liquidity framework in light of international initiatives such as directives from the European Commission, market developments and its own experience in supervising liquidity risk.
