The European Banking Authority (EBA) published a Report on the effects of the unwind mechanism of the liquidity coverage ratio (LCR) over a three-year period, from the end of 2016 to the first quarter of 2020. Overall, the empirical evidence does not support the hypothesis
that the unwind mechanism has a detrimental impact on the business and risk profile of credit institutions.
As the EBA’s analysis shows that the specific impact of the unwind mechanism on the LCR is practically null, it is also not possible to affirm that it could have an effect on the stability and orderly functioning of financial markets.
Also at country level, the data suggests that the unwind mechanism would not lead to any specific effect on the LCR, except for one EU country.
As regards the possible impact on the functioning of the monetary policy, the Report, which is built under the assumption that the amount of central bank reserves has been substantially cut, shows that the specific effect of the unwind mechanism would be immaterial.
The EBA also analyses possible modifications to the unwind mechanism and the Report shows that their impact is limited as well.
