The first part of the ESRB recommendation on funding is a call to national supervisors to intensify their supervision of banks' funding and liquidity, in particular with respect to:
- the feasibility of the funding plans provided by credit institutions, both individually and collectively (for each national banking system, on an aggregated basis);
- banks' plans to reduce their reliance on central bank liquidity;
- the impact of banks' funding plans on the flow of credit to the real economy;
- innovative instruments; and
- uninsured deposit-like financial instruments, which are sold to retail customers.
The EBA is recommended to monitor the first three of these areas at EU-wide level.
The other part of the ESRB recommendation relates to encumbered assets, including for national supervisors to ensure that banks:
- define their approach to asset encumbrance, and the procedures and controls that ensure that the risks associated with collateral management and asset encumbrance are adequately identified, monitored and managed;
- include in their contingency plans strategies to address the contingent encumbrance resulting from relevant stress events; and
- have in place a general monitoring framework that provides timely information to the management and the relevant management bodies on the amount, evolution and types of asset encumbrance (and of unencumbered but encumberable assets) and related sources of encumbrance, such as secured funding.
Money market funds (MMFs)
The ESRB recommendations are based on three main arguments:
- MMFs "may be systemic because they perform maturity and liquidity transformation";
- MMFs are vulnerable to deposit runs, and possibly to contagion across the sector, and are interconnected to the rest of the financial system; and
- investors in MMFs may not realise that there is no safety net (be it in the form of sponsor support, deposit protection or access to central bank liquidity facilities).
The ESRB recommends that MMFs should:
- convert to variable net asset value
- use fair value accounting (with only very restricted use of amortised value accounting)
- hold a minimum amount of highly liquid assets (but the ESRB does not specify how much)
- put in place tools to deal with liquidity constraints (eg. temporary suspension of redemptions)
- disclose key features (eg. possibility of loss of principal, likelihood of sponsor support and accounting methods), and
- report in more detail to the relevant supervisory authorities.
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