An assessment of CRD IV liquidity requirements and its impact on banks in Malta

Abstract

The recent global financial crisis served as an eye-opener for regulators around the world as they embarked on a journey to strengthen regulation across all sectors, and the banking sector was no exception. The introduction of CRD IV not only strengthened capital requirements for banks, but also introduced new requirements including two new liquidity standards, the Liquidity Coverage Ratio and the Net Stable Funding Ratio and new liquidity reporting requirements that banks need to abide by. The Liquidity Coverage Ratio aims to ensure that banks maintain adequate unencumbered high quality liquid assets available for surviving 30 days of stress. The Net Stable Funding Ratio aims to ensure that banks have adequate stable funding to cover their obligations over a one-year period under both normal and stressed conditions. All banks around the world are preparing themselves for the new requirements which are being monitored during 2014 and will come into force as from 2015. Banks are faced with massive tasks to comply with the new liquidity requirements and will also face great costs of compliance. But banks must go beyond mere compliance and must make fundamental changes to their business strategy. Banks need to reassess the way they do business, not only to survive but also to gain competitive advantage. In order to be successful, banks will need to reassess their liquidity risk management frameworks focussing mainly on their business model, their governance structures, their metrics and methodologies, their reporting requirements and their IT Framework. The aim of the dissertation is to analyse the new liquidity standards and their impact on banks in Malta. More specifically, this dissertation will look at a sample of four banks in Malta in order to understand the readiness of local sector for the CRD IV liquidity requirements.