What liquidity requirements apply? Has the jurisdiction implemented the Basel III liquidity requirements, including regarding LCR and NSFR?
Banking & Finance
The Bank of Israel Proper Banking Conduct Rule 221 implements liquidity requirements from banking institutions. PBC Rule 221 generally adopts the Basel III Rules in connection with the liquidity coverage ratio (LCR) while setting minimum liquidity requirements for Israeli banking institutions and authorizing the Supervisor of Banks to set forth higher requirements with respect to specific banking institutions if it finds that the current liquidity requirements are insufficient in connection with the liquidity risks faced by such certain banking institutions. The liquidity requirements apply to all banking institutions with a certain differentiation between banks on a stand-alone basis and banks which are a part of a jointly controlled banking group. PBC Rule 221 elaborates on the details and methods of calculation of the LCR.
Under PBC Rule 221, the LCR minimal requirement for Israeli banking institutions became effective on April 1, 2015, when it was set at 60%. The LCR minimal requirement increased to 80% in January 1, 2016 and to 100% in January 1, 2017, the level it is in as of this date.
With respect to the management of liquidity risk, the Hungarian Banking Act lays down general quality requirements, while quantity requirements – such as the Liquidity Coverage Ratio (the “LCR”) and Net Stable Finding Requirements (the “NSFR”) – are stipulated by the CRR and the related regulation of the Commission. Accordingly, the Hungarian Banking Act prescribes a general requirement for credit institutions to maintain their liquidity and solvency continuously. Such requirement is to be ensured and achieved through proper regulatory capital (please see details under Question No. 10), appropriate liquidity risk management policies and procedures.
In Hungary, since 1 April 2016 the LCR requirement has been set at the level of 100% by the HNB on the basis of the authorization given under the CRR for Member States for the transitional period lasting until 1 January 2018 when such level (100%) shall be mandatorily applicable in each Member State. Consequently, as of 1 January 2018, the given regulation of HNB has been replaced by the respective provisions of the CRR and, hence, has been repealed.
Regarding the NFSR, the provisions of the CRR shall be applied directly. In November 2016, the Commission has submitted its proposal to the European Parliament and the Council on the amendment of the CRR with respect to – among others – the NSFR proposing the rate of 100%. We understand however that the introduction of such binding minimum standard is still pending.
The FCMC has adopted normative regulations of 28 December 2009 No. 195 “On Liquidity Requirements, Procedure for Execution Thereof and Management of Liquidity Risk”. In addition, the liquidity requirements prescribed by the CRR and the CRD IV and the Commission delegated Regulation (EU) 2015/61 of 10 October 2014 to supplement CRR with regard to liquidity coverage requirement for Credit Institutions are applicable.
Article 412(1) of the CRR imposes a liquidity coverage requirement on banks formulated in general terms as an obligation to hold ‘liquid assets, the sum of the values of which covers the liquidity outflows less the liquidity inflows under stressed conditions’. Pursuant to Article 460 of the CRR, the EU Commission is empowered to specify in detail that liquidity coverage requirement and the circumstances under which competent authorities have to impose specific in- and outflow levels on banks in order to capture specific risks to which they are exposed. In accordance with Recital 101 of the CRR, the rules should be comparable to the liquidity coverage ratio set out in the international framework for liquidity risk measurement, standards and monitoring of the Basel Committee on Banking Supervision (BCBS), taking into account the EU and national specificities. Until the full implementation of the liquidity coverage requirement from 1 January 2018, Member States should be able to apply a liquidity coverage requirement up to 100 % for credit institutions in accordance with national law.
Article 413(3) of the CRR states that the EU Member States may maintain or introduce national provisions in the area of stable funding requirements before binding minimum standards for net stable funding requirements are specified and introduced in the EU in accordance with Article 510 of the CRR.
It has to be noted that the EU Commission had proposed the introduction of the NSFR, and that the European Central Bank (ECB) envisaged the implementation of the NSFR in January 2018 (https://www.ecb.europa.eu/paym/groups/pdf/mmcg/20170926/2017-09 26_MMSR_Item_5_iii_NSFR.pdf?3294d2e9a73c282389db328e497f1c9f).
Lithuania applies the liquidity requirements, set Basel III requirements that are briefly summarized below.
Banks must hold sufficient liquid assets to be able to cover net cash outflows under gravely stressed conditions within 30 days. The value of the liquidity coverage ratio (LCR) must not be below 100%, i.e. a bank’s reserves of liquid assets must not be lower than net cash outflows over 30 calendar days under gravely stressed conditions.
The large exposure requirement is applied as well. Exposure to a client or a group of connected clients, i.e. loans granted, also any asset or off-balance-sheet asset share cannot exceed 25% of the bank eligible capital, or EUR 150 million, whichever the higher, provided that the sum of exposure values.
All credit institutions (banks) need to report the LCR templates according to the Delegated Act, while investment firms exempted.
The Bank of Lithuania conducts regular top-down solvency and liquidity stress tests in order to assess the domestic banking system’s resilience to adverse shocks, using an in-house methodology. Solvency stress testing is focused on the assessment of the banks’ credit loss and profitability under an adverse macroeconomic scenario over a two-year horizon and on a quarterly basis. Liquidity stress testing involves sensitivity analysis. Aggregate results of the solvency and liquidity stress tests are made public once a year in the Bank of Lithuania’s Financial Stability Review.
Banks in Poland must maintain a liquidity coverage ratio of at least 100 % (starting from 2018) as per Art. 4 of Commission Delegated Regulation (EU) 2015/61 of 10 October 2014 to supplement the CRR.
NSFR has not been implemented yet, but a similar Polish liquidity requirement, called, M4 applies.
The competent authority determines the liquidity coverage requirements taking into account credit institutions' reports as of the implementation of the CRR. Currently, the NBR does not set liquidity coverage requirement in addition to those required in CRR.
Pursuant to the Basel III reforms, the historical Indian banking regulatory approach to proper liquidity management (using tools like the statutory liquidity ratio (SLR) requirements and the asset-liability management guidelines prescribed by the RBI) has been enhanced by the incorporation of the liquidity coverage ratio (LCR) and the net stable funding ratio (NSFR) minimum standard concepts.
The LCR requirement has been binding on all banks since 1 January 2015. The current prescribed LCR level since 1 January 2018 is 90% and will be at the prescribed level of 100% by 1 January 2019. In line with the Basel III recommendations, the LCR has been defined as the total stock of high-quality assets (HQLA) divided by the total net cash outflow projected for the next 30 calendar days. The target therefore is that by 2019 the stock of HQLA should at least equal the total net cash outflows for the following month. HQLA has been defined to comprise of ‘Level 1 assets’ like cash, government securities, etc. and ‘Level 2 assets’ that includes assets like bonds, commercial papers, shares, etc. (the latter level of assets would be subject to haircut and allocation requirements).
The RBI issued draft guidelines on NSFR in May 2015 and it is expected that the final guidelines on the subject will be issued by March 2018. The draft NSFR guidelines provide guidance on the calculation of the available stable funding and the required stable funding. The time frame to be considered was one year. It is possible that the final rules may prescribe the required NSFR ratio to be more than 100% to ensure greater resilience in the system.
The FSA has implemented the Basel III LCR, and a bank with international operations is required to maintain the minimum LCR, which is 80% in 2017, and will be raised to 90% in 2018 and 100% in 2019.
The FSA has not implemented the NSFR.
In order to maintain and monitor continuous liquidity, the MFSA expects that every credit institution establishes an active treasury management operation whose functions should include the monitoring of the maturity structure of the institution's receivables and payables as well as its assets and liabilities taking into account the type, scope and risks of the institution's activities.
A credit institution is expected to maintain continuous liquidity by:
- holding sufficient available cash or liquefiable assets, subject to the qualification that marketable assets vary in quality in terms of the prices at which they are capable of being sold;
- securing an appropriately matching future profile of cash flows from maturing assets, subject to the qualification that in practice there may be shortfalls if borrowers are unable to repay;
- maintaining an adequately diversified deposit base in terms both of maturities and range of counterparties (bank and non-bank) which, depending importantly on the individual credit institution's standing and on the general liquidity situation at the time, may provide the ability to raise fresh deposits without undue cost;
- maintaining the minimum applicable liquidity ratios.
Malta has implemented the CRR liquidity requirements, including those around LCR (currently subject to transitory provisions which will be fully implemented in 2019) and NSFR (currently subject to an observation period and shall be introduced as a binding minimum standard this year) requirements.
The Monetary, Credit, Foreign Trade and Exchange Policy for fiscal years 2016 and 2017 released by the CBN pegs the minimum LCR for commercial banks in Nigeria at 30%. The CBN provides that merchant and non-interest banks shall continue to maintain a minimum Liquidity Ratio of 20% and 10%, respectively, subject to review from time to time. The CBN has not prescribed any NSFR requirements for banks in Nigeria.
Yes, Norway has implemented the Basel III liquidity requirements such as liquidity coverage ratio (LCR) and net stable funding ratio (NSFR), LCR in each significant currencies, except for Norwegian Krone, and 50% LCR in Norwegian Krone for banks with EUR or US$ as their significant currency as well as LCR and NSFR reporting requirements to the NFSA.
Banco de Portugal shall assess whether any imposition of a specific liquidity requirement is necessary to capture liquidity risks to which a credit institution is or might be exposed, taking into account:
a) the particular business model of the institution;
b) the credit institution’s arrangements;
c) the outcome of the review of the arrangements, strategies, processes, and mechanisms implemented by credit institutions and risk evaluation carried out by Banco de Portugal
d) systemic liquidity risk that threatens the integrity of the financial markets of the EU Member States concerned.
Banco de Portugal may apply administrative fines or accessory sanction, including prudential charges, the level of which broadly relates to the disparity between the actual liquidity position of a credit institution and any liquidity and stable funding requirements established at national or Union level.
Liquidity Coverage Ratio is implemented in Portugal since 2015. Net Stable Funding Ratio would be implemented during 2018.
Qatar has implemented the Basel III liquidity requirements, including regarding LCR and NSFR.
The QCB, as part of it’s strategic plan for financial sector regulation, had issued a Liquidity Coverage Ratio (LCR) circular to banks in January 2014 and it was amended in May 2014 to incorporate the changes effected by the Basel Committee on Banking Supervision (BCBS).
The Net Stable Funding Ratio (NSFR) is being implemented only as a supervisory observation.
The Liquidity Ordinance reflects the final Basel III rules, in particular also on the LCR. Under the Liquidity Ordinance, since 2015, Swiss banks are subject to an initial 60% LCR requirement, with incremental increases by 10% per year until January 1, 2019. SIBs are subject to an initial minimum LCR requirement of 100% since January 1, 2015, and the associated disclosure requirements, and, based on FINMA requirements, a minimum LCR of 110% at all times.
FINMA further requires Swiss banks to report the NSFR to FINMA on a monthly basis. The reporting instructions are generally aligned with the final BCBS NSFR requirements. Following an observation period that began in 2012, the Swiss Federal Department of Finance lately informed banks that the NSFR requirements will not be finalised in 2017 as was initially planned. The Swiss Federal Council is currently expected to decide on next steps at the end of 2018.
Additionally, in order to facilitate the smooth functioning of the money market, Swiss banks are required to keep minimum reserves consisting of Swiss Franc denominated coins, banknotes and sight deposit accounts which the banks hold with the SNB in an amount of 2.5% of the average of such bank's short-term Swiss Franc denominated liabilities at the end of the three months preceding the reporting period.
Basel III liquidity framework is implemented in Turkey under the Regulation on the Calculation and Evaluation of Liquidity Adequacy of Banks (the “LA Regulation”); the Regulation on the Calculation of Banks’ Liquidity Coverage Ratios (the “LC Regulation”) and various guides on the liquidity management tools for banks, including, amongst others, the liquidity management policies, liquidity stress tests and liquidity buffers in order to ensure that banks in Turkey achieve and maintain (i) adequate levels of liquidity and (ii) high quality liquid assets in order to effectively serve their debts with their assets and meet their net cash outflows.
There are two different liquidity adequacy ratios in Turkey: (i) overall liquidity adequacy ratio (the “OLAR”) (i.e. the ratio of a bank’s TL and foreign currency denominated assets to the TL and foreign currency denominated liabilities) and (ii) foreign currency denominated liquidity adequacy ratio (the “FCLAR”) (i.e. the ratio of a bank’s foreign currency denominated assets over the foreign currency denominated liabilities).
The OLAR and FCLAR are subject to weekly legal reporting and calculated for both the first maturity segment (i.e. 0 to 7 days) and the second maturity segment (i.e. 0 to 31 days) and shall not be less than 100% and 80% respectively on both consolidated and unconsolidated basis.
The liquidity level of a bank shall be determined as per the leverage coverage ratios (“LCR”) of the respective bank and such ratio refers to the ratio of the high quality liquid assets to net cash outflow. As such, LCR shall be calculated separately with respect to total (TL and foreign currency) liquidity coverage and foreign currency liquidity coverage. Pursuant to the LC Regulation, consolidated and unconsolidated total LCRs and the consolidated and unconsolidated foreign currency LCRs shall not be less than 100% and 80%, respectively.
The NSFR does not exist under the Turkish banking legislation currently in effect; however, the BRSA has recently issued a draft regulation on the determination and calculation of NSFR and introduction of ‘required stable funding ratio’ (“RSFR”) for banks. As per the draft regulation, assets and liabilities of banks are classified in different groups based on their risk weights and be subjected to different rates to be taken into consideration in the calculation of NSFR and RSFR.
The CRR requires entities to hold enough liquid assets to deal with any possible imbalance between liquidity inflows and outflows under gravely stressed conditions during a period of 30 days (Liquidity Coverage Ratio, “LCR”). The LCR as a short-term liquidity business ratio is fully phased in, in 2018. In addition the European Commission proposed that credit institutions shall also have to ensure that their long term obligations will adequately be met with a diversity of stable funding instruments under both normal and stressed conditions (Net-Stable-Funding Ratio — NSFR as a long-term liquidity business ratio).
Furthermore, entities are required by the national BWG to ensure that they are able to meet their payment obligations at any time e.g., by establishing company-specific financial and liquidity planning based on banking experience (sec 39 para 3 BWG).
Ordinance No. 11 on Bank Liquidity Management and Supervision (Ordinance No.11) and in the Credit Institutions Act (CIA) set forth the liquidity requirements. Banks are to manage their liquidity in a manner that ensures regular and prompt fulfilment of their daily obligations, both in a normal banking environment and in a crisis situation.
Bulgarian banks are required to apply robust policies, strategies, processes and systems for identification, measurement, management, and monitoring of liquidity risk. The liquidity management system includes:
- rules and procedures for identification, measurement, management and supervision of liquidity;
- liquidity management body directly subordinated to the bank’s management body; and
- effective management information system.
Banks submit to BNB monthly liquidity reports showing projected cash flows. If BNB finds out that a bank has a significant liquidity problem requiring immediate measures, BNB may require the bank to submit weekly or daily reports, based on a liquidity crisis scenario, reflecting the bank’s plan for survival. BNB is also entitled to conduct on-site inspections in order to establish the efficiency of the liquidity management system.
The LCR (Liquidity Coverage Ratio) is already in force in Bulgaria as of 2015.
As regards NSFR (Net Stable Funding Ratio), it is expected to be implemented in Bulgaria after its adoption at EU level.
The entities of the national financial system, in order to maintain an adequate level of liquidity that promotes growth and work, are obliged to maintain the proportion of the total liquidity determined by the Monetary and Financial Policy and Regulation Board for each type of financial entity.
The entities of the national financial system must maintain sufficient levels of high quality liquid assets free of liens, encumbrances or restrictions, which can be transformed into cash in a certain period of time without significant loss of their value in relation to their obligations and contingent, as it may be determined by the Monetary and Financial Policy and Regulation Board.
The levels and administration of liquidity will be determined by the Monetary and Financial Policy and Regulation Board and will be measured using, at least, the following parameters:
(i) Immediate liquidity;
(ii) Structural liquidity;
(iii) Liquidity reserves;
(iv) Domestic liquidity;
(v) Liquidity gaps.
As per section 10 above, the Basel III framework is implemented in Europe by way of CRDIV. CRR sets out liquidity coverage ratio requirement (LCR) and net stable funding ratio requrirement (NSFR).
LCR requires a bank to hold high-quality unencumbered liquid assets sufficient to cover net liquidity requirements over 30 days. LCR stands at 100% as of 1 January 2018.
NSFR compares the amount of a bank’s available stable funding to its required stable funding to measure how the bank’s asset base is funded. Banks are required to maintain a stable funding profile in relation to the composition of their assets and off-balance sheet activities. NSFR is a minimum standard as of 1 January 2018.
The provisions of the Capital Requirements Directive IV (CRD IV) have been transposed into French law so that credit institutions and investment companies must respect a 100% permanent ratio between liquid assets or quickly achievable assets and the portion of short-term payments.
Additionally, the LCR must be applied by the credit institutions.
The LCR has been adopted in Belgium effective 1 January 2011, meaning that the Belgian regulator radically anticipated the phased-in approach of Article 460 CRR and imposed at once a 100% coverage of liquidity at one month under stressed circumstances.
Similarly to the leverage ratio, the NSFR currently needs to be reported and disclosed, but no binding requirement applies. As part of the Basel IV/CRD V package however, the European Commission has proposed to render such ratio binding.
Estonia has set liquidity requirements with amendments in CIA and other related acts in 2014. The new liquidity requirements provide a liquidity coverage ratio (LCR). The liquidity tracking period began in 2014 and minimum standards applied from 2015.
As per the provisions of the Regulation 575/2013 (Capital Requirements Regulation), as of 1 January 2018, all credit institutions operating in Greece must comply with the Basel III liquidity requirements, including the liquidity coverage ratio ('LCR') and the net stable funding ratio ('NSFR').
Regulation 2015/61 (supplementing the Capital Requirements Regulation) includes provisions elaborating on the obligation of credit institutions to maintain a liquidity coverage ratio of at least 100%. Likewise, legislative initiatives regarding the specification of the NSFR framework are currently in progress at EU level.
In Greece, credit institutions must periodically report both their LCR and their NSFR to the BoG.
Yes. Germany has implemented the Basel III liquidity requirements, and these apply in Germany.
The US has implemented Liquidity Coverage Ratio requirements applicable to large banking organisations. In 2016, the US federal banking regulators proposed a rule to implement Net Stable Funding Ratio requirements, which has not been adopted.
Although Colombia has not specifically implemented the LCR standard recommended in Basel III, since the year 2009 the Superintendence of Finance implement the IRL (Indicador Riesgo de Liquidez) that can be calculated in two ways, the IRLm and the IRLr. According to de Superintendence of Finance’s standards, the IRLm must be equal or superior than zero and the IRLr must be equal or superior than 100% in order to represent adequate liquidity.
According to the Act on Credit Institutions the liquidity of a credit institution must be adequately safeguarded in relation to its operations. It is expressly prohibited for a credit institution to take a risk in its operations that would substantially endanger its liquidity. Credit institutions are required to set up effective and reliable strategies to identify, measure and manage liquidity risk.
The liquidity requirements applicable to credit institutions derive from the Capital Requirements Regulation and Commission Delegated Regulation (EU) 2015/62 with regard to the leverage ratio. Credit institutions must have sufficient liquid assets to cover liquidity outflows reduced with liquidity inflows to cope with liquidity stress, and must maintain a certain liquidity coverage ratio (LCR). The current ratio is 100%. NSFR is the second major liquidity-monitoring instrument next to the LCR. It is introduced by the Capital Requirements Regulation as a long-term structural ratio designed to address liquidity mismatches. It requires banks as of January 2018 to maintain a stable funding profile in relation to their on- and off-balance sheet activities. The minimum level is currently 100%.
The UK has implemented the LCR regime and is aligned with the CRR requirement that banks should have enough high quality liquid assets in their liquidity buffer to cover the difference between the expected cash outflows and the expected capped cash inflows over a 30-day stressed period and accordingly with effect from 1 January 2018, the ratio requirement that banks have to meet is 100%.
The NSFR regime is not yet in force in the UK as final EU legislation is awaited. It is expected that when implemented, the NSFR regime will require banks to maintain a stable funding profile in relation to their on- and off-balance sheet activities. Expressed as a percentage and set at a minimum level of 100 %, it indicates that an institution holds sufficient stable funding to meet its funding needs during a one-year period under both normal and stressed conditions. As allowed under EU rules, preferential treatment will be possible in certain exceptional cases.