Single Rulebook Q&A

Question ID: 2017_3266
Legal act : Regulation (EU) No 575/2013 (CRR)
Topic : Liquidity risk
Article: 425(2)(g), 460
Paragraph:
Subparagraph:
Article/Paragraph : 32
COM Delegated or Implementing Acts/EBA RTS/EBA ITS/EBA GLs: Delegated Regulation (EU) 2015/61 - DR with regard to liquidity coverage requirement
Subject matter : Treatment of inflows from credit facilities in LCR
Question:

If an institution expects that a credit facility is prolonged when it becomes due or a renegotiation date occurs, should institutions report an inflow at the due/renegotiation date?


Shall institutions report interest payments on credit facilities as inflows if customers do not pay interests in cash?

Background on the question:

Different reporting practices with respect to credit facilities may imply that inflows become too large in some cases. To avoid this, we seek clarification with respect to the treatment of inflows from credit facilities in the LCR.

According to Article 32 in Delegated Regulation (EU) 2015/61 an inflow from credit facilities may arise if:

1. A credit facility becomes due, cf. Article 32; and
2.There is a contractual payment of interests related to the facility, cf. Article 32.
Question 1: In the case at hand, the legal contracts behind credit facilities between a credit institution and a banking customer state that customers are obliged to repay their debt in connection to a credit facility to the credit institution at contractually set dates. This can be an expiry date for the facility or a renegotiation date. However, it is common practice to prolong credit facilities for a longer period in time, if customers wish to do so. Furthermore, it might not be reasonable to expect that the costumer can pay their debt at these dates. This implies that despite contractually set dates at which the facilities become due, there is no repayment of debt from most facilities to credit institutions. However, some credit institutions report inflows from prolonged credit facilities even though there is no actual debt repayment. Furthermore, some facilities both have a contractual date of termination and a “renegotiation date” at which the terms of the facility are renegotiable. That is, we have identified the following reporting practices:
- Case A: Some institutions estimate inflows based on contractual termination dates and report an inflow even if the contract is expected to be prolonged.
- Case B: Some institutions also include estimated inflows based on contractual “renegotiation dates” and report an inflow on these even if the contract is expected to be prolonged.
- Case C: Some institutions estimate inflows based on actual expected repayments (in cash) of debt from credit facilities. If credit facilities are expected to be prolonged when they become due (case A and B above), should institutions report an inflow? Should institutions only report inflows from credit facilities if they expect there to be debt repayments in cash (case C above)?


Question 2: The legal contracts behind credit facilities between a credit institution and a banking customer can state that customers are obliged to pay interest to the credit institution, which would imply inflows in the LCR. Interest payments in cash will give rise to inflows in the LCR, cf. Article 32 LCR DA. If interest payments take another form, would it also give rise to inflows in the LCR? For instance, could institutions report inflows from interest payments on facilities, which take place by increasing the total drawn amount on the credit facility, e.g. there is no interest payment in cash to the credit institution?

Date of submission: 07/04/2017
Published as Final Q&A: 25/08/2017
EBA answer:

In respect of credit facilities provided to financial customers, only contractual inflows maturing within 30 calendar days for which the credit institution has no reason to expect an extension of the due date (i.e. non-performance) shall be reported as liquidity inflows, as per Articles 32(1), 32(2) and 32(3)(a) of Delegated Regulation (EU) 2015/61 (LCR DA).

With regard to debt to be repaid to the reporting credit institution in the context of credit facilities, only those facilities shall be considered where the expiry date falls within the next 30 calendar days and where there is no contractual option for prolongation. Furthermore, only those inflows shall be considered where the reporting credit institution has no reason to expect that the customer cannot pay back the debt at the contractual date of termination. If the latter were to be the case, the inflows cannot be recognised as they would be contingent.

Credit institutions shall report inflows in the cases where there is an interest payment that becomes contractually due in cash within the next 30 days. There is no inflow from interest payments on credit facilities if the interest payments lead to increases in the total drawn amounts on the credit facilities.

Status: Final Q&A
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