The comprehensive reform package of the Basel Committee on Banking Supervision (Basel III) has been in effect in the EU since 1 January 2014. The regulations commit banks to larger capital buffers and set requirements for liquidity coverage. The reforms aim to improve the regulation, the supervision and the risk management of banks and, as a result, to increase the resilience of both individual banks and the banking system as a whole.
Liechtenstein, as a member of the EEA, implemented the Basel III standard with the enactment of the Capital Requirements Regulation (CRR) and the accompanying Capital Requirements Directive (CRD IV) on 1 February 2015.
Bank Recovery and Resolution Directive
The Recovery and Resolution Act (RRA) and the Recovery and Resolution Ordinance (RRO) have been in force in Liechtenstein since 1 January 2017. The EEA country has thereby transposed the Directive 2014/59/EU on the recovery and resolution of financial institutions (the Bank Recovery and Resolution Directive (BRRD)) into national law. Through the RRA, among other things, Liechtenstein has provided a framework for solving the “too-big-to-fail” issue and strengthening the stability of the Liechtenstein financial system.
The RRA requires LLB, as a systemically important bank in Liechtenstein, to submit a recovery plan to the Liechtenstein Financial Market Authority (FMA). The recovery plan contains an analysis of measures determined as part of an overall bank stress test that can be taken to restore its financial position under various crisis scenarios.
Internal capital adequacy assessment process
The Liechtenstein Banking Act (FL-BankG) requires the banks to have in place sound, effective and complete strategies and processes to assess and maintain on an ongoing basis adequate equity capital. The internal capital adequacy assessment process (ICAAP) is an important risk management instrument for the LLB Group. The ICAAP is documented in the internal regulations and guidelines and is reviewed and revised annually, taking into account overall bank stress tests.
Internal liquidity adequacy assessment process
The Banking Ordinance (FL-BankV) requires the banks to have in place robust strategies, policies, processes and systems that enable them to identify, measure, manage and monitor liquidity risk. The internal liquidity adequacy assessment process (ILAAP) is set down in the internal regulations and guidelines and is reviewed and revised annually.
Within the framework of the ILAAP, the liquidity coverage ratio (LCR), as a binding regulatory liquidity reference figure, represents an important indicator both for liquidity risk assessment as well as liquidity risk management. At the end of 2017, a regulatory lower limit of 80 percent was applicable for the LLB Group. The minimum requirement ensures that credit institutions maintain a reasonable level of liquidity in order to cover their liquidity requirements in the case of a liquidity stress scenario within 30 calendar days. With an LCR of 126 percent (2016: 115%), the LLB Group’s ratio was substantially higher than that required under the regulations.