This page addresses the offsetting of inflows and outflows within the Liquidity Coverage Ratio (LCR). The credit institution has the opportunity on a case-by-case basis, following authorisation by the respective competent supervisory authority (the European Central Bank or the Financial Market Authority as applicable) to apply higher inflows or lower outflows for credit and liquidity facilities.
Articles 422 and 425 of the Capital Requirements Regulation (Regulation (EU) No 575/2013 “CRR”) define the offsetting of inflows and outflows within the LCR (for the identification of the net outflow of funds in the LCR denominator).
Undrawn credit or liquidity facilities and any other commitments received are generally not taken into account as inflows (= 0 % inflow; point g) of Article 425 (2) CRR, see point g) of Article 32 (3) of the Delegated Regulation on LCR) and are viewed in a very conservative manner as outflows (up to 100 % run-off-factor, see Article 31 Delegated Regulation on LCR). The danger of contagion of a liquidity shortage from one credit institution to another should hereby be reduced. Other credit institutions are perhaps not in the position to be able to honour credit facilities. They should not be able to decide that the legal and reputational risk in the event of not honouring an acceptance can be taken into account, in order to protect their own liquidity or to reduce their exposure against the credit institution that is encountering liquidity difficulties. Outflows are calculated on an individual basis depending on the counterparties (up to 100 % outflow).
The Delegated Regulation on the LCR (delegated Regulation on LCR) has more closely defined the treatment of credit and liquidity facilities and have drawn up provisions for so-called “preferential treatment”.
Pursuant to Article 422 8 CRR in conjunction with Article 29 dR LCR and Article 425 (4) CRR in conjunction with Article 34 dR LCR the competent authorities may however permit, on an individual basis to apply higher inflows or lower inflows for credit and liquidity facilities, provided that all of the following conditions are fulfilled:
- there are reasons to expect a higher inflow even under a combined market and idiosyncratic stress of the counterparty;
- the counterparty is a parent or subsidiary institution of the institution or another subsidiary of the same parent institution or linked to the institution by a relationship within the meaning of Article 12(1) of Directive 83/349/EEC or a member of the same institutional protection scheme pursuant to Article 113 (7) CRR or the
central institution or a member of an affiliation, for which the exception in accordance with Article 10 CRR applies;
- the counterparty applies a corresponding symmetrical or conservative outflow (see point c) of Article 29 (1) and point c) of Article 34 (1) dR LCR);
- The institution and the counterparty are domiciled in the same Member State (except where Article 425 (5) CRR in conjunction with point b) of Article 20 (1) CRR is applied). (See Article 34 (2) dR LCR and Article 29 (2) dR LCR as well as the accompanying EBA RTS (from July 2015)).
The obligatory cap of 75 % inflows (“75 % cap”, see last sentence of Article 425 (1) CRR) remains unaffected by this authorisation process.
This information should provide a brief overview of the intended procedure:
The application for an approval pursuant to Article 425 (4) CRR and/or Article 422 (8) CRR has been possible since the publication of the delegated Regulation in accordance with Article 460 CRR (delegated Regulation LCR) in the Official Journal of the European Union.
- Preferential treatment will have an actual effect (that can be empirically proven) on compliance with the LCR
- Justified assumptions that inflows will be higher even under a combined market and idiosyncratic stress of the counterparty;
- Contractual assurance that the counterparty assumes a symmetrical or even more conservative outflow in the LCR
- Fulfilled LCR minimum ratio by the counterparties
- Integration of the effects of the approval in appropriate liquidity risk management
- So that credit institutions do not solely rely on the expected inflows of funds from facilities thereby creating increased concentration risks, the authorisation for preferential treatment of facilities on inflows of funds is restricted to those that form a maximum of 25 % of total inflows of the beneficiary institution. For the purpose of calculating the 25 % all inflows from facilities are added together and are treated as a joint facility. Depending on the risk profile of the institution making the application this cap may also be set more strictly (e.g. 20 %, 15 %, etc.).
- Filled out application form
- A clear representation of the relationships of the entities within the group or IPS (listed by Commercial Register number) including ownership relationships as well as the effective control as at the last balance-sheet date as well as the two preceding balance-sheet dates – confirmed by the external auditor;
- Confirmation that all entities within the group have their registered office in the same Member State
- Precise description of the facilities which are intended to be given preferential treatment, as well as naming which institutions shall contribute liquidity and receive liquidity
- In the case of IPSs: Submission of administrative decision granting approval in accordance with Article 113 (7) CRR
- Contractual agreements (an agreement between the institution providing liquidity or the group-wide or IPS-wide agreement including the signatures of the responsible persons from all institutions making the application);
- Filled out reporting forms (at least three LCR reports using the latest available ITS Reporting Template (the LCR Calculation Tool is used for this purpose in particular) including a depiction of the effect on the LCR of the approval being applied for
- Submission of additional documents including a query of stress test results, business continuity plans and the consolidated risk situation
- Evidence that the inflows will be higher despite the stress scenario
- Empirical proof, that a successful approval in accordance with Article 425 (4) CRR or Article 422 (8) CRR actually has beneficial effects on LCR compliance.
This notice is supplied by the Financial Market Authority solely for information purposes. No rights and obligations over and above the provisions of the law can be derived from this information.
The Financial Market Authority reserves the right to place additional requirements (e.g. the restriction of inflows) or to request additional proof from the institutions during the approval process.