Notice No. 14/GBM/2017, of June 9 – Liquidity Ratio for Credit Institutions

--- Bank of Mozambique --- --- Governor ---

Notice No. 14/GBM/2017 Maputo, June 9, 2017

SUBJECT: Liquidity Ratio of Credit Institutions

Given the need to introduce a prudential ratio to monitor liquidity levels in the banking system, the Bank of Mozambique, exercising the powers conferred by paragraph d) of paragraph 2 of Article 37 of Law No. 1/92, dated January 3 – Organic Law of the Bank, and by Article 64 of Law No. 15/99, dated November 1 – Credit Institutions and Financial Companies Act, updated by Law No. 9/2004, dated July 21, determines:

CHAPTER I

GENERAL PROVISIONS

Article 1 (Subject matter and scope of application)

1. This Notice establishes the requirements and calculation basis for the liquidity ratio and applies to all credit institutions subject to the supervision of the Bank of Mozambique.

2. The institutions referred to in the preceding paragraph that, according to Articles 3 and 8 of Notice No. 4/GBM/2007, dated May 2, do not present their financial statements in accordance with International Financial Reporting Standards (IFRS), shall also apply the provisions of this Notice with the necessary adaptations.

Article 2 (Duty of continuous compliance)

Credit institutions must continuously and permanently observe the liquidity ratio established in this Notice.

--- Bank of Mozambique --- --- Governor ---

Article 3 (Definitions)

For the purposes of this Notice, the following shall apply:

a) Liquid assets – assets that can be easily converted into currency with minimal possible loss;

b) Historically preferred assets in crisis situations – assets with a history of having a higher probability of being preferred by investors due to their low risk in crisis scenarios;

c) Low correlation – an insignificant level of relationship between the value of the liquid asset and the credit quality of the issuer or debtor;

d) Low volatility – a situation in which asset prices remain relatively stable and less susceptible to significant fluctuations over time;

e) Encumbrance-free – free from legal, regulatory, contractual or other restrictions that limit the bank's ability to settle, sell, transfer or allocate the asset;

f) Active and substantial market – a market characterized by the ease of finding willing buyers and sellers, when the difference between the buying and selling price is minimal, or when there is a high trading volume and low level of concentration;

g) Short-term liabilities – short-term obligations whose maturity occurs within 12 months;

h) Liquidity ratio – the relationship between liquid assets and short-term liabilities.

CHAPTER II

LIQUID ASSET REQUIREMENTS

Article 4 (Composition of liquid assets)

1. Liquid assets comprise the following:

--- Bank of Mozambique --- --- Governor ---

a) Banknotes and coins;

b) Deposits at the Bank of Mozambique, excluding mandatory reserves;

c) Demand or time deposits held with other credit institutions;

d) Negotiable securities issued or guaranteed by governments, central banks, public sector entities, international organizations or multilateral development banks, in accordance with Notice No. 11/GBM/2013, dated December 31, concerning the Calculation of the Base for Minimum Capital Requirements to Cover Credit Risk, provided they meet the following criteria: i) Be eligible for a 0% risk weight, in accordance with Notice No. 11/GBM/2013, dated December 31; and ii) Not be an obligation of a financial institution or its affiliates.

e) Debt securities issued by the Government of Mozambique and the Bank of Mozambique, provided they are denominated in national currency, if not eligible for a 0% risk weight under Notice No. 11/GBM/2013, dated December 31;

f) Other assets, provided they meet the requirements established in Articles 5, 6 and 7 of this Notice.

2. The Bank of Mozambique may periodically review the composition of liquid assets.

Article 5 (General requirements for liquid assets)

Credit institutions must hold liquid assets that meet the following requirements:

a) Low risk;

b) Ease and certainty of valuation; and

c) Low correlation with risky assets.

Article 6 (Market-related requirements for liquid assets)

Liquid assets must meet the following market-related requirements:

a) Be traded in an active and substantial market;

b) Exhibit low volatility; and

c) Be historically sought after in crisis situations.

Article 7 (Operational requirements for liquid assets)

1. All liquid assets in the portfolio must be encumbrance-free.

2. Credit institutions must not include in the liquid asset portfolio those that would lack operational capacity to be converted into cash to meet cash outflows in adverse situations, despite meeting the "encumbrance-free" definition specified in paragraph e) of Article 3 of this Notice.

3. The liquid asset must not be pledged, implicitly or explicitly, to secure, collateralize or strengthen the credit of any transaction, nor be allocated to cover operational costs.

4. Assets received in reverse repo and securities financing operations that are held by the institution, have not been used in other operations as collateral, and are legally and contractually available for the bank's use, may be considered part of the liquid asset portfolio.

5. Credit institutions must, at least once every quarter, convert into cash a representative portion of the liquid assets in their portfolio through repo or outright sale, in order to test their market access, the effectiveness of cash conversion processes and asset availability, as well as minimize negative signaling risk in adverse situations.

CHAPTER III

LIQUIDITY RATIO

Article 8 (Calculation of the liquidity ratio)

The liquidity ratio is calculated based on the following formula:

Liquidity ratio = (Liquid assets / Short-term liabilities) x 100

Article 9 (Liquidity ratio limit)

Credit institutions must maintain, on a daily basis, a liquidity ratio of no less than 25%.

Article 10 (Reporting frequency and commencement)

1. Credit institutions must report the liquidity ratio to the Bank of Mozambique on a daily basis.

2. The reporting of the liquidity ratio begins 30 days from the date of publication of this Notice.

CHAPTER IV

FINAL PROVISIONS

Article 11 (Instructions)

The Bank of Mozambique issues the instructions necessary for compliance with this Notice.

Article 12 (Clarification of doubts)

Any doubts arising from the interpretation and application of this Notice shall be submitted to the Prudential Supervision Department of the Bank of Mozambique.

Article 13 (Entry into force)

This Notice enters into force on the date of its publication.

[Signature] Rogério Lucas Zandamela Governor