BANKY FOIBEN'I MADAGASIKARA

DIRECTION DES OPERATIONS MONETAIRES

INSTRUCTION N° 006-DOM/21 Governing the Granting of the Emergency Liquidity Facility to Credit Institutions by Banky Foiben'i Madagasikara

The Governor of Banky Foiben'i Madagasikara,

Having regard to Law No. 2016-004 of 29 July 2016, supplemented by Law No. 2016-057 of 2 February 2017, establishing the Statutes of the Central Bank of Madagascar;

Having regard to Law No. 2020-011 of 1 September 2020 on banking law;

Having regard to Decree No. 2019-2069 of 6 November 2019 repealing the provisions of Decree No. 2014-1684 of 29 October 2014 on the appointment of the Governor of the Central Bank of Madagascar;

DECIDES

Article 1: Purpose

In application of Article 35 of Law No. 2016-004 of 29 July 2016, supplemented by Law No. 2016-057 of 2 February 2017, establishing the Statutes of the Central Bank of Madagascar, the latter may grant an exceptional advance known as the "Emergency Liquidity Facility" or ELF to credit institutions.

This Instruction sets out the contextual framework, conditions, and procedures for implementing the ELF granted by Banky Foiben'i Madagasikara to credit institutions.

Article 2: Definitions

For the purposes of this Instruction, the following terms shall mean:

• Resolution Authority: For the purposes of this Instruction and in application of Article 34 of Law No. 2020-011 of 1 September 2020 on banking law, the Banking and Financial Supervision Commission (CSBF) is the Resolution Authority responsible for maintaining the soundness of banking service providers.
• Systemic Liquidity Crisis: A liquidity crisis that simultaneously affects multiple credit institutions.
• Emergency Liquidity Facility (ELF): The provision of short-term liquidity to address temporary liquidity stress.

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• Recovery Measures: Measures provided for in the second paragraph of Article 35 of Law No. 2016-004 of 29 July 2016, supplemented by Law No. 2016-057 of 2 February 2017, establishing the Statutes of the Central Bank of Madagascar, intended to correct the situation that led to the credit institution's need for an ELF.
• Eligible Participants: Credit institutions governed by the Banking Law.
• Bank Run: A sudden loss of depositor confidence in their banks' ability to meet their obligations, resulting in a massive simultaneous withdrawal of liquidity.

Article 3: Framework for Implementing the ELF

In the event of temporary liquidity difficulties faced by a credit institution, upon proposal by the Banking and Financial Supervision Commission, the Central Bank may grant an exceptional emergency liquidity advance.

The ELF is specifically intended to counter a particular type of market failure in the following cases:

• An exceptional economic shock that could trigger a systemic liquidity crisis, paralyzing the entire refinancing system;
• A bank run with financial contagion effects.

Under no circumstances may loans granted by BFM be used to recapitalize a credit institution, nor to address problems related to insufficient capital that caused liquidity shortages.

Facilities enabling credit institutions to obtain liquidity already provided for in Instruction No. 006-DOM/19 of 29 October 2019 on money market instruments are excluded from this Instruction.

Article 4: Conditions for Granting the Emergency Liquidity Facility

Without prejudice to BFM's discretionary assessment power, the ELF is granted when the following conditions are cumulatively met:

i. the credit institution is solvent; ii. the credit institution can provide sufficient collateral accepted in BFM's portfolio; iii. the emergency liquidity request is deemed justified; iv. the advance is necessary to preserve the stability of the financial system; v. the management of the credit institution is not placed under State control.

Article 5: Implementation Procedures for the Emergency Liquidity Facility

5.1-Interest Rate The interest rate applicable to the ELF shall equal the marginal lending facility rate in effect at the time of signing the ELF Agreement, plus 1.5 percentage points. Optionally, default interest may be charged.

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5.2-Term

• On Duration: The term of an ELF is thirty (30) days, renewable in periods of thirty (30) days and as many times as necessary until the credit institution's liquidity situation improves.
• On Renewal: Loans are renewable if the credit institution's liquidity problem has not yet been resolved and following the solvency analysis by the CSBF. Renewal is subject to the prior approval of the CSBF based on the recovery measures defined in Article 2.

5.3-Collateral Eligible collateral for the ELF consists of those accepted with their corresponding haircuts in Instruction No. 005-DOM/2021 of 03 December 2021 implementing Law No. 2019-009 of 22 January 2020 governing BFM's repurchase operations. Where applicable, BFM's Board of Directors may require a Government guarantee. The value of the collateral shall equal 120% of the nominal value of the loans granted. If the counterparty fails to repay the loan, BFM may sell or retain the pledged collateral to cover any incurred losses.

5.4-Other Required Documents A credit institution seeking an ELF must sign and provide in advance the following documents in the format prescribed by BFM:

• an ELF agreement;
• a pledge deed for the submitted collateral;
• any other agreements or documents potentially required by BFM.

Article 6: Management of the Emergency Liquidity Facility

6.1-BFM's Sovereignty Regarding ELF Renewal BFM holds discretionary power to assess the appropriateness of renewing an ELF benefiting a credit institution.

6.2-Confidentiality BFM is bound by confidentiality rules regarding information provided by credit institutions in the context of the ELF.

Article 7: Miscellaneous and Final Provisions

This Instruction shall enter into force as of 21 DEC 2021.

Antananarivo, 21 DEC 2021

The Governor Henri Edmond RABARIJOHN