Funding & liquidity requirements under CRD IV : exploring the impact on Malta's credit institutions

Abstract

In order for credit institutions to operate in the financial market, a stable funding and liquidity on their Balance Sheet is required. In fact, banks have a number of sources from where they obtain funding, which is known as the Funding Mix. Furthermore, the 2007-08 financial crisis resulted in a wake-up call for regulators around the world, especially in the EU, to come up with stricter regulations. In this respect, banks have stricter minimum capital requirements to abide to, as well as higher liquidity requirements that they should hold as a contingency for any circumstances that might occur during economic and business cycles. These include the LCR, NSFR and the Standard Reporting Requirements. Banks in Malta are currently undergoing a period of excess liquidity, however are still required to abide by these requirements. With regards to this, the DG FISMA consultation paper (2015) argued on the possible impact of the CRR and CRD IV on the banking sector. In fact, it states that; “CRR and CRD IV requirements should create the confidence in the banking sector conducive to the flow of bank savings into investment projects such as infrastructure, education, research and innovation, but should not constitute an unnecessary hurdle in this respect.” The study on the local market, focuses on one significant bank and another two less significant banks. The main impact under the new regulations showed that banks have to adopt to new liquidity requirements, such as the LCR and NSFR, in conjunction to regularly stress testing their liquidity positions. Banks are now also more conscious of their balance sheet risks. The new funding obligations, while strengthening risk management and the compliance function of local banks, resulted in highlighting the higher costs of compliance and human resource requirements for specialised roles.