Question ID
2017_3125
Legal act
Regulation (EU) No 575/2013 (CRR)
Topic
Liquidity risk
Article
114, 137
Paragraph
2
COM Delegated or Implementing Acts/RTS/ITS/GLs/Recommendations
Delegated Regulation (EU) 2015/61 - DR with regard to liquidity coverage requirement
Article/Paragraph
10(1)(c)(ii)
Name of institution / submitter
MUFG Securities EMEA
Country of incorporation / residence
UK
Type of submitter
Competent authority
Subject matter
High income OECD countries and Liquid asset classifications
Question

Can high income OECD countries’ Government bonds be considered as Level 1 assets for the purposes of the LCR?

Background on the question

We understand that there are several interpretations currently adopted in the market when it comes to the liquidity classification of high income OECD countries’ Government Bonds.

We refer in particular to the following view: according to Article 137(1) of Regulation (EU) No 575/2013 “for the purpose of Article 114, institutions may use credit assessments of an Export Credit Agency that the institution has nominated…” Given that Countries classified by the Organisation for Economic Co-operation and Development (OECD) as ‘High Income countries’, prior to the withdrawal of ratings for countries in this category, were rated as MEIP = 0, a risk weight of 0% should be applied in line with Table 9 of Article 137(2) of Regulation(EU) No 575/2013.

In 2012 the OECD agreed that the automatic classification of High Income OECD countries in Country Risk Category Zero should be terminated, however stated that these countries “will remain subject to the same market credit risk pricing disciplines that are applied to all Category Zero countries.”

We wonder if it could therefore be interpreted that “a consensus risk score” according to Article 137(1)(a) of Regulation (EU) No. 575/2013 (CRR) exists, which would permit a risk weighting of 0% in line with Table 9 of Article 137(2) of Regulation(EU) No 575/2013.

With a risk weight of 0% the assets could be treated as Credit Quality Step 1 in line with Table 1 of Article 114(2) of Regulation(EU) No 575/2013. They can therefore be classified as Level 1 assets according to Article 10(1)(c)(ii) of the Commission Delegated Regulation (EU) (2015/61).

Submission date
Final publishing date
Final answer

High Income OECD countries’ Government bonds do not automatically qualify as Level 1 assets for the purposes of the LCR.

Unlike for central governments of Member States for which Article 10(1)(c)(i) of the Commission Delegated Regulation (EU) (2015/61) does not apply additional constraints, Article 10(1)(c)(ii) of the Commission Delegated Regulation (EU) (2015/61) requires for qualification as Level 1 assets without restrictions that the central government of a third country is assigned a credit assessment by a nominated ECAI which is at least credit quality step 1 in accordance with Article 114(2) CRR. There is no provision in the Commission Delegated Regulation (EU) (2015/61) to replace the ECAI assessment requirement by any other alternative.

While Article 137 of Regulation (EU) No 575/2013 (CRR) permits using credit assessments of an Export Credit Agency for the purposes of Article 114 CRR, a direct assignment to the credit quality steps in Article 114(2) CRR is not provided.

Additionally, as provided under point (i) of Article 10(1)(d) of the Commission Delegated Regulation (EU) (2015/61), where the central government or central bank of a third country is not assigned a credit quality step 1 credit assessment by a nominated ECAI, credit institutions may include assets representing claims on or guaranteed by the central government as Level 1 assets to the extent that these assets cover stressed net liquidity outflows incurred in the same currency in which the assets, together with withdrawable reserves in that central bank as referred to in point (ii) of that Article, cover stressed net liquidity outflows incurred in the same currency in which the those assets is are denominated. Where the those assets is are not denominated in the domestic currency of the third country, the credit institution may only recognise the those assets as level 1 up to the amount of the credit institution’s stressed net liquidity outflows in that foreign currency corresponding to its operations in the jurisdiction where the liquidity risk is being taken.

Status
Final Q&A
Answer prepared by
Answer prepared by the EBA.
Note to Q&A

Update 26.03.2021: This Q&A has been updated in the light of the changes introduced to Commission Delegated Regulation (EU) No 2015/61.

Disclaimer

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