Title II – Guidance regarding the identification of retail deposit products subject to higher outflows

Part 1 – General considerations

A retail deposit should be considered to be part of an established relationship for purposes of liquidity reporting under a combined idiosyncratic and market-wide stress scenario when the depositor meets at least one of the following criteria:

• (a) has an active contractual relationship with the institution of a minimum duration,
• (b) has a borrowing relationship with the institution for mortgage loans or other long term loans, or
• (c) has a minimum number of active products, other than loans, with the institution.

2. Determination of ‘transactional account , including accounts to which salaries are regularly credited ’

A retail deposit should be considered as being held in a transactional account when salaries, income or transactions are regularly credited and debited respectively against that account.

3. For both considerations in paragraph 1 and 2 of this Title II, Part 1, institutions should have historical data available, including on depositors behaviour, to substantiate the classification of their deposits.

4.1. Retail deposits should be grouped in three buckets of deposits subject to higher outflows on the basis of the number and riskiness of risk factors they meet, among those described in Part 2 of the Guidelines below. Nevertheless, the list of factors provided therein is non-exhaustive and

Page 11 of 29 institutions that identify additional criteria leading to higher outflows should include these in their analysis.

4.2. Institutions should estimate, for purposes of liquidity reporting, the appropriate higher outflows for each of these buckets in accordance with Part 3 of the Guidelines below.

Part 2 - Factors affecting the stability of retail deposit products

5.1. Institutions should consider as high value deposits those which fulfil all the following requirements:

• (a) they exceed the lower of one of the following two amounts:
• (i) EUR 100 000 or
• (ii) the local deposit guarantee scheme amount
• (a) they are lower than EUR 500 000.

5.2. Institutions should consider as very high value deposits those of at least EUR 500 000.

5.3. For the purposes of calculating the value of a client’s deposits, institutions should include all the client’s deposit accounts at that institution in t he calculation.

5.4. In addition, institutions should carry out a concentration analysis of their deposit base; adequate thresholds and/or limits to define high value retail deposits need to be introduced for internal purposes.

5.5. There are a number of methods that may be employed to identify the concentration of the deposit base. For example, institutions might identify a ‘certain number’ of large retail deposits or identify the ‘number of largest retail deposits’ that represent a certain percentage of the ret ail deposit base. To identify high value retail deposits institutions may use the threshold tailored to the local market for the deposit guarantee amount, the amount above which the interest rate is negotiated or any special arrangement agreed with the depositor that may limit the risk of outflows.

6.1. A deposit should be considered to be rate-driven where an institution offers an interest rate:

• (a) that significantly exceeds the average rate for similar retail products offered by their peers, given the specificities of the local deposit market,
• (b) or whose return is derived from the return on a market index or set of indices,
• (c) or whose return is derived from any market variable other than a floating interest rate.

6.2. Institutions can identify 'rate-driven' products by comparing the rate that applies to each deposit to the average paid by their peers for similar products. The term ‘ p eers’ refers to institutions with a comparable business model and size, to be defined by the institution and verified by the competent authority if deemed necessary.

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7.1. Deposits which should be considered as falling within this category are:

• (a) deposits originally placed as fixed-term with an expiry date maturing within the 30-day period or
• (b) deposits with fixed notice periods shorter than 30 days, in accordance with contractual arrangements, other than those that qualify for the treatment provided for in Article 421(5).

7.2. When assessing retail deposit outflows, institutions should consider the impact of:

• (a) withdrawal limits or notice periods;
• (b) the cost of withdrawal for retail deposit products which can legally be terminated prior to their original maturity date.
• (c) the consequence, on the reputation of the institution, of not allowing deposit withdrawals, where institutions have developed a practice of allowing early redemption of such deposit products.

8. High risk distribution channels, including internet only access banks, other forms of remote access and brokered deposits

Institutions should assign retail deposits accessed via high risk distribution channels such as internet only access banks, other forms of remote access and brokered deposits (where brokers collect funds from a natural person or SME) to higher outflows, taking account of the following:

• (a) plausible existing contractual limits to withdrawals;
• (b) the consequence, for the reputation of the institution, of not allowing deposit withdrawals, where institutions have developed a practice of allowing higher redemption levels for these products.

Institutions should distinguish between local and foreign currency denominated retail deposits.

Institutions should distinguish between resident and non-resident retail deposits. This distinction should be defined in terms of non-EU resident and EU resident deposits with respect to deposits with institutions whose headquarters are based in the EU. The definition of 'residence' for the purposes of liquidity coverage requirements should generally follow the statistical or tax definition applicable.

Institutions should identify the residency of the depositor at the solo entity level.

Institutions should identify retail deposit products with linkages to other factors which may change during the 30-day period and result in a higher outflow risk.

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12.1. Institutions should consider their retail deposit base to identify any other characteristics that indicate or might indicate a retail deposit type with higher outflow rates than those specified in Article 421(1) and (2) CRR. The identification or non-existence of other characteristics should be documented.

12.2. In order to identify such characteristics, institutions should assess the observed (historical) and expected stability/volatility for the specific retail deposit products offered and identify product types that proved, or are believed might prove, to be unstable.

12.3. For this purpose, institutions should conduct a stress test scenario assuming a combined severe idiosyncratic and market-wide event. Internal statistical and mathematical models could be used to assess the volatility of retail deposit products. The inputs for these methods should generally comprise data derived from the past behaviour of deposits and from hypothetical assumptions based on stress scenarios.

12.4. Small and less sophisticated institutions could use simplified methods based on statistical models, such as models identifying the maximum decrease observed in a 30-day period for a given deposit on a given time horizon including a stressed period.

12.5. The use of expert judgement is encouraged in order to include factors not taken into account by a model, especially in the case of innovative products without a long history.

12.6. A ranking of retail deposit products in terms of volatility or perceived volatility would be a very useful tool in the analysis. This would assist in consistent implementation across an institution’s retail deposit products. The comparison of the results obtained for different products and the identification of outliers may help identify less stable deposits.

12.7. The assumptions underpinning these methods should comprise a 30-day prediction and be frequently reviewed, in particular to capture any material change in market conditions. In addition, institutions should consider correlation, contagion effects and seasonal effects to improve the quality of this assessment.

Part 3

13.1. Institutions should apply the following methodology in categorising deposits subject to higher outflows:

Page 14 of 29 13.2. Factors described above in Part 2 of these Guidelines should be divided into two categories:

• (a) High Risk, comprising the following risk factors:
• (i) the currency of deposits;
• (ii) product-linked deposits;
• (iii) products that are rate-driven or have preferential conditions;
• (iv) high-risk distribution channels, including Internet only access and brokered deposits;
• (v) high value deposits;
• (vi) other characteristics that the institution considers of high risk in accordance with paragraph 13 of the Guidelines above.
• (b) Very High Risk, comprising the following risk factors:
• (i) maturing fixed-term or notice period deposits;
• (ii) non-resident deposits;
• (iii) very high value of the deposit.

13.3. Institutions should assess retail deposits against the set of factors described above.

13.4. Institutions should assign retail deposits to one of the three following tiered buckets defined on the basis of the number of risk factors attributed to the underlying deposit:

• (a) deposits with two factors from category 1;
• (b) deposits with three factors from category 1, or with one factor from category 1 and one factor from category 2;
• (c) deposits with two factors from category 2, or with two factors from category 1 and one factor from category 2, or with any other mix of factors.

13.5. Institutions should estimate the corresponding higher outflow rates for each bucket according to the historical and expected volatility assessment.