Single Rulebook Q&A

Question ID: 2016_3048
Legal act : Regulation (EU) No 575/2013 (CRR)
Topic : Liquidity risk
Article: 416
Paragraph: 1
Subparagraph: a
Article/Paragraph : 10
COM Delegated or Implementing Acts/EBA RTS/EBA ITS/EBA GLs: Delegated Regulation (EU) 2015/61 - DR with regard to liquidity coverage requirement
Name of institution: European Central Bank
Country of incorporation / residence: Germany
Subject matter : Treatment of central bank reserves in third countries
Question:

What is the treatment of central bank reserves in third countries held by a branch?

Does the eligibility of those reserves for the purpose of the LCR strictly depend on the existence of an agreement between the competent authority of the reporting institution and the central bank in which the conditions of a withdrawal have been specified?

Background on the question:

According to Article 10(1)(b)(iii) of LCR Commission Delegated Regulation (EU) 2015/61, reserves held by the credit institution in a central bank can be counted towards the liquidity buffer provided that the credit institution is permitted to withdraw such reserves at any time during stress periods and the conditions for such withdrawal have been specified in an agreement between the relevant competent authority and the ECB or the central bank.

In this regard, the paragraph is referring to central banks in accordance with Article 10(1)(b)(i) [ECB or a Member State’s central bank] and Article 10(b)(ii) [central banks of third countries, provided that exposures to the central bank or its central government are assigned a credit assessment by a nominated external credit assessment institution (ECAI) which is at least credit quality step 1 in accordance with Article 114(2) of Regulation (EU) No 575/2013].

However, the question is now how to treat reserves in third countries where such an agreement does not exist or where further information is only provided in the legal framework which does not apply to branches. In the concrete case, an EU credit institution has a branch which is located in a third country (ECAI of the relevant country is “1” so Article 10(b)(ii) of LCR Commission Delegated Regulation (EU) 2015/61 may apply).

The branch holds some reserves at the central bank in the third country and the EU credit institution is now asking about the treatment of those reserves for the purpose of the LCR. Strictly speaking and following Article 10(1)(b)(iii) of LCR Commission Delegated Regulation (EU) 2015/61, credit institutions would now expect an agreement between the competent authority in the EU and the central bank in the third country. However, the relevant competent authority in the third country has only published some specifications on how to treat deposit balances at the relevant central bank in its legal framework, i.e. this framework does not apply to branches of EU institutions so the provisions in this text cannot be applied in the concrete case.

Strictly following the LCR Commission Delegated Regulation (EU) 2015/61, the conditions set in Article 10(1)(b)(iii) of LCR Commission Delegated Regulation (EU) 2015/61 are not met and the reserves held by the credit institution at the central bank in the third country are not eligible as Level 1 assets.

This would have far-reaching consequences as it would require the competent authority to set-up bilateral agreements with all central banks over the world to make sure that central bank reserves could generally qualify as liquid assets. In this case, the only possibility to consider those reserves would be under the cash inflows in accordance with Article 32(2) of LCR Commission Delegated Regulation (EU) 2015/61 which does not foresee further restriction to the definition of inflows. However, the same question would arise here regarding the treatment of required minimum reserves. On the eligibility of central bank reserves as high quality liquid assets, it should be noted that in the Basel III LCR framework, an agreement is required between the “local” supervisor and the central bank which could be interpreted differently compared to the LCR Commission Delegated Regulation (EU) 2015/61.

Date of submission: 13/12/2016
Published as Final Q&A: 28/07/2017
EBA answer:

Article 10(1)(b)(iii) sets up that the branches and affiliates of credit institutions in third countries may include their local central bank reserves among their liquid assets if they are permitted to withdraw those reserves at any time during stress periods and the conditions for such withdrawal have been specified in an agreement between the relevant home competent authority of the credit institution and the central bank of the host country.

In the absence of such a specific agreement between the relevant home competent authority of the credit institution and the central bank in the host third country where those reserves are held, the conditions set in Article 10(1)(b)(iii) of the LCR Commission Delegated Regulation (EU) 2015/61 are not met and the reserves held by the credit institution in the central bank in the third country are not eligible as Level 1 assets for the purpose of LCR. However those reserves may be eligible to be considered as cash inflow under Article 32(2)(a) Commission Delegated Regulation (EU) 2015/61 provided that they can be withdrawn at any time within 30 calendar days.

Status: Final Q&A
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