What liquidity requirements apply? Has your jurisdiction implemented the Basel III liquidity requirements, including regarding LCR and NSFR?
Banking & Finance (2nd edition)
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.
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 was fully phased in in 2018; amendments made by the commission delegated regulation will be applicable as of 30 April 2020. 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).
The Republic of Cyprus has implemented the Basel III liquidity requirements in relation to liquidity coverage ratio (‘’LCR’’), as specified in the Capital Requirements Regulation (EU) 575/2013 which is directly applicable in Cyprus. The specified liquidity requirements are:
- Banks shall hold liquid assets, the sum of the values of which covers the liquidity outflows less the liquidity inflows under stressed conditions in order to make sure that banks preserve levels of liquidity buffers that are sufficient to face any probable imbalance between liquidity outflows and inflows under highly stressed conditions over a period of thirty days. During times of stress, banks are able to use their liquid assets so as to cover their net liquidity outflows.
- Banks shall not count double liquidity inflows and liquid assets.
- Banks are able to use the abovementioned liquid assets to meet their obligations under stressed circumstances.
- Banks must maintain a minimum LCR requirement.
It is also stated under the Law that the CBC may set a minimum ratio of liquefiable assets to be held by ACIs in relation to the liabilities and other obligations of ACIs that may arise or mature within a period.
Regulation (EU) 575/2013 has not implemented the liquidity requirements regarding the net stable funding ratio (‘’NSFR’’), and it states that institutions shall observe a general funding obligation until the introduction of the NSFR.
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 to maintain a stable funding profile in relation to their on- and off-balance sheet activities. The minimum level is currently 100%.
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.
Basel III liquidity framework is implemented in Turkey under the Regulation on the Calculation and Evaluation of Liquidity Adequacy of Banks; 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 issued a draft regulation on the determination and calculation of NSFR and introduction of ‘required stable funding ratio’ (“RSFR”) for banks, in January 2018. 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. Although the draft regulation sets out that it will take effect as of January 1, 2018, the draft regulation has yet to be enacted by the BRSA.
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 in-creases 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 require-ments, 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 in-structions 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 re-quirements will not be finalised as was initially planned. The Swiss Federal Council is currently expected to decide on next steps at the end of 2019.
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.
Yes. Germany has implemented the Basel III liquidity requirements, and these apply in Germany.
Yes, Basel III liquidity requirements were implemented in the Slovak Republic and are applicable. Banks in Slovakia shall maintain a liquidity coverage of at least 100%.
Singapore has implemented the Basel III liquidity requirements. The liquidity coverage ratio requirements are set out in MAS Notice 649.
In relation to the net stable funding ratio, the requirements are set out in MAS Notice 652.
The FSA is implementing the Basel III LCR. A bank with international operations must maintain the minimum LCR, which is currently 100%.
The FSA released the draft NSFR rule to the public for comment in June 2018 and plans to introduce the minimum NSFR of 100% in March 2019.
Oman has implemented the Basel III liquidity requirements, including regarding LCR and NSFR. The CBO, as part of its strategic plan for financial sector regulation, has restricted liquidity mismatches to 15 per cent. of cumulative liabilities in both OMR and US$ for one year with the Liquidity Coverage Ratio Requirement to be achieved fully by 2019 and the standard for Net Stable Fund Ratio requirement effec-tive from 2018 with banks being required to maintain a longer-term NSFR at 100 per cent.
The By-law on the Liquidity Coverage Ratio of commercial banks approved by the Decree N70/04 of the President of the National Bank establishes the liquidity requirement LCR. Under Article 3.3 of the By-law, in the absence of a situation of financial stress, LCR for the aggregated amount of all currencies shall not be lower than 100%. In addition, the liquidity coverage ratio in the specific foreign currency shall not be lower than 100% and in the national currency - lower than 75%. Under to Article 1.2 of the By-law, in case any rule or definition is not provided by the By-law, the bank shall adhere to the standards established by the Basel Committee on Banking Supervision and other internationally established standards with a prior agreement with the National Bank of Georgia.
The National Bank of Georgia has elaborated the draft By-law on the Net Stable Funding Ratio (NSFR) but has not approved it yet. According to the draft, the NSFR shall not be lower than 100%. If the bank anticipates that the coefficient may be lower than 100%, the bank shall present the improvement plan and the NBG shall review it during taking the respective supervisory action.
See our answer above under section12.
The liquidity requirements applicable in Luxembourg are those adopted at the European level, i.e. stemming from the CRR Regulation and its implementing/delegated acts.
Accordingly, the Liquidity Coverage Ratio (the "LCR") requirements applicable in Luxembourg are those set out in Commission Delegated Regulation (EU) 2015/61 of 10 October 2014 supplementing the CRR Regulation with regard to liquidity coverage requirement for credit institutions.
As far as the Net Stable Funding Ratio (the "NSFR") is concerned, we are not aware of the existence of a finalised definition thereof at the EU-level at this stage. Nonetheless, the EBA monitors the compliance of CRR institutions with the NSFR in accordance with the current Basel III standards.
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.
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 later on in 2019), and NSFR requirements.
The QCB Implementation Instructions – Basel III Framework for Conventional Banks provides the following:
Risk weights for eligible liquidity facilities
For eligible liquidity facilities as defined in paragraph 217 and where the conditions for use of external credit assessments in paragraph 206 are not met, the risk weight applied to the exposure’s credit equivalent amount is equal to the highest risk weight assigned to any of the underlying individual exposures covered by the facility.
The QCB Implementation Instructions – Basel III Framework for Conventional Banks further provides under paragraph 217 that:
Eligible liquidity facilities
Banks are permitted to treat off-balance sheet securitisation exposures as eligible liquidity facilities if the following minimum requirements are satisfied:
a) The facility documentation must clearly identify and limit the circumstances under which it may be drawn. Draws under the facility must be limited to the amount that is likely to be repaid fully from the liquidation of the underlying exposures and any seller-provided credit enhancements. In addition, the facility must not cover any losses incurred in the underlying pool of exposures prior to a draw, or be structured such that draw-down is certain (as indicated by regular or continuous draws);
b) The facility must be subject to an asset quality test that precludes it from being drawn to cover credit risk exposures that are in default. In addition, if the exposures that a liquidity
LCR is calculated based on the requirements of EU Regulation 61/2015. The implementation of the indicator is fully effective starting with 2018.
NSFR is only reported based on the provisions of Regulation 575/ 2013. However, the implementation of the ratio is still open as no mandatory requirement is currently applied.
Liquidity level of the bank is presented by: - bank liquidity indicator, - narrow liquidity indicator, - coverage by liquid assets indicator. The bank is obligated to manage liquidity risk, by maintaining the liquidity level in line with regulated indicators, so that: 1) liquidity indicator: - amounts to a minimum of 1.0 when calculated as an average of liquidity indicators for all business days of the month, - is not lower than 0.9 for more than three consecutive days, - is a minimum of 0.8 when calculated for one business day, 2) narrow liquidity indicator - amounts to a minimum of 0.7 when calculated as an average of liquidity indicators for all business days of the month, - is not lower than 0.6 for more than three consecutive days, - is a minimum of 0.5 when calculated for one business day. The bank is obligated to maintain the indicator of coverage with liquid assets, in sum of all currencies, on the level not under 100%. Our jurisdiction applied Basel III liquidity requirements, including the ones referring to LCR and NSFR.
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.
The US has implemented Liquidity Coverage Ratio requirements applicable to large banking organizations. In 2014, the US banking agency jointly adopted a final rule implementing a “liquidity coverage ratio” (LCR) applicable to large, internationally active banking organizations, certain designated nonbank financial companies, and certain consolidated subsidiary depositary institutions thereof (LCR Rule). The LCR Rule is expressly patterned on the international standard established by the Basel Committee, albeit with some adjustments to reflect the unique characteristics of the US market and US regulatory scheme. Thus, the LCR Rule imposes a somewhat more stringent requirement than the Basel Committee’s framework. In broad strokes, the LCR Rule requires subject entities to maintain a minimum LCR, defined as the ratio of unencumbered “high-quality liquid assets” (HQLA) to “total net cash outflows,” over a prospective period of 30 calendar days, a form of standardized stress test scenario. The question posed by the LCR Rule to subject institutions is as follows: Assuming that cash outflows over the coming period are large and cash inflows are weak, does the bank have sufficient readily liquefiable assets to weather the storm?
Depending on the size and activities of the subject entity, the LCR Rule imposes two distinct requirements, referred to herein as the “Full LCR,” applicable to large, internationally active banking organizations, and the “Modified LCR,” applicable to other large bank or savings and loan holding companies that in the Agencies’ view pose less severe systemic risks. The LCR Rule became effective on January 1, 2015.
In 2016, the US banking agencies invited comment on a proposed rule to implement a net stable funding ratio (NSFR) requirement. The proposed NSFR rule would establish a quantitative metric to measure and help ensure the stability of the funding profile of a banking organization over a one-year time horizon. The US banking agencies have not yet adopted a final NSFR regulation.
In 2018, the US federal banking regulators proposed a new rule to implement adjustments to the risk-weighted liquidity and capital requirements for large US banking organizations as described above in response to Question 13. The proposed rule has not yet been adopted.
Italy has implemented the Basel III liquidity requirements, and both the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR) apply in Italy.
Italian banks belonging to a banking group are exempted from the application of the LCR on an individual basis, while banking groups, if some conditions and requirements are met, are exempted from calculating the leverage ratio of exposures to entities that belong to the same group and are incorporated in Italy.
Thailand has implemented the Basel III liquidity requirements. The BoT has issued the notifications with respect to liquidity coverage ratio requirements since 2015 (to be implemented in full by 2020) and the relevant notification in relation to the net stable funding ratio in 2018.
According to the Slovenian Banking Act, a bank must establish and implement reliable strategies, a policy and procedures for managing liquidity risks to ensure that it maintains adequate levels of liquidity buffers at all time. In particular, the liquidity risk management should include the following:
- the planning of known and potential liquidity outflows and expected liquidity inflows from assets, liabilities and off-balance-sheet items,
- the regular management of liquidity for relevant time series, including on an intra-day basis,
- a distinction between pledged assets and assets free of encumbrances that are available at all times, including in stress situations,
- the definition of appropriate measures to prevent or eliminate the causes of liquidity deficits.
Slovenia has implemented the Basel III liquidity requirements such as liquidity coverage ratio (LCR) and net stable funding ratio (NSFR).