2020_5550 Treatment of cash on Nostro accounts – i.e., Bank’s cash held by a third party institution acting as a service provider for payment and settlement purposes

Question ID:

2020_5550

Legal Act:

Regulation (EU) No 575/2013 (CRR)

Topic:

Credit risk

Article:

134

Paragraph:

COM Delegated or Implementing Acts/RTS/ITS/GLs/Recommendations:

Not applicable

Article/Paragraph:

not applicable

Disclose name of institution / entity:

Type of submitter:

Credit institution

Subject Matter:

Treatment of cash on Nostro accounts – i.e., Bank’s cash held by a third party institution acting as a service provider for payment and settlement purposes

Question:

Do exposures related to cash on Nostro / correspondent bank accounts (i.e., Bank’s cash held by a third party institution acting as a service provider for payment and settlement purposes) qualify for a 0% risk weight (equivalent to cash and cash balances at central banks) in both Standardized and IRB approach according to articles 134(3) and 156 (a), respectively?

Background on the question:

Our understanding is that exposures related to cash on Nostro accounts can be treated according to article 134(3) for Standard approach and 156(a) of CRR for IRB approach applicable to cash in hand and equivalent cash items.
Cash held on Nostro accounts for correspondent banking purposes is:
■ Equivalent to cash in hand as those accounts are sight/demand deposits recorded within “cash and cash balances at central banks” according to Commission Implementing Regulation (EU) No 680/2014 Annex V. Part 2, paragraph 3
■ Composed of very short-term exposures related to payment and settlement services and according to the paragraph (56) of CRR Recital “very short-term exposures related to money transmission including the execution of payment services, clearing, settlement and custody services” are exempt from a treatment similar to the one applied to other exposures to institutions
Furthermore, this treatment would be consistent with article 390(6) of CRR which excludes Nostro accounts in the large exposure calculation. This treatment would also be aligned with the LCR calculation methodology, in which Nostro accounts receive a 100% inflow weighting as expressed in Q&A 2014_1576.

Date of submission:

14/10/2020

Published as Final Q&A:

11/11/2022

Final Answer:

An exposure resulting from a deposit on a Nostro Account held at a third party institution constitutes an exposure to an institution within the meaning of Article 112(f) CRR under the Standardised Approach or Article 147(2)(b) CRR under the IRB Approach respectively.

Accordingly, the risk weight for a deposit on a Nostro Account has to be determined in accordance with the requirements applicable to exposures to institutions pursuant to Chapter 2 or Chapter 3 of Part Three, Title II of the CRR, as applicable.

With regard to Article 390(6) CRR and the relation with Nostro account, please see Q&A 4805.

Status:

Final Q&A

Answer prepared by:

Answer prepared by the EBA.