BANK OF THE REPUBLIC OF BURUNDI

THE GOVERNOR

CIRCULAR NO. 04/2018 ON THE SHORT-TERM LIQUIDITY RATIO OF BANKS ISSUED PURSUANT TO LAW NO. 1/17 OF AUGUST 22, 2017 GOVERNING BANKING ACTIVITIES

Having regard to Law No. 1/34 of December 2, 2008 on the Statutes of the Bank of the Republic of Burundi, particularly Articles 7 (paragraphs 4 and 6) and 8;

Having regard to Law No. 1/17 of August 22, 2017 governing banking activities, particularly Articles 3, 48, 49, 50, 51 and 63;

Having reviewed Circular No. 04/2013 on the liquidity coefficient of banks;

The Bank of the Republic of Burundi, hereinafter referred to as the "Central Bank", hereby enacts:

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CHAPTER I: GENERAL PROVISIONS

Article 1: Object

This circular sets out the provisions regarding short-term liquidity ratios established respectively in Burundian Francs (BIF) and foreign currencies applicable to banks.

Article 2: Definitions

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

• High-Quality Liquid Assets (HQLA), assets that can be easily and immediately converted into liquidity without or with little loss of value during periods of severe liquidity stress and that meet the requirements set out in Article 5 of this circular;

• central government, ministries, provinces and public sector entities;

• public administration, central government and local governments as well as social security administrations;

• domestic bank, a bank under Burundian law;

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foreign bank, a bank under foreign law;

cancelled deposits, deposits to be returned within one month following contract cancellation;

operational deposits, deposits that clients must maintain with a bank as part of certain activities to make payments. Eligible activities are cash management, clearing or custody services necessary for a client to conduct its banking operations under normal conditions over the next 30 days. These deposits must arise from underlying services provided by the bank and be held in specific accounts. The bank must have evidence showing that the client cannot withdraw these deposits without compromising its operational functioning;

public sector entity, a non-commercial administrative body that reports to central, regional or local governments or authorities exercising the same activities as central or local governments, or a non-commercial company owned or created by central governments and supported by them as sponsors and benefiting from explicit guarantees;

credit institutions, banks and financial institutions;

payment institution, a legal entity, other than the Public Treasury, Central Bank, credit institution, National Post Office, or microfinance institution, which is licensed by the Central Bank to provide payment services;

rating, external rating assigned by internationally renowned rating agencies such as Fitch, Standard & Poor's and Moody's or any other rating agency recognized by the Central Bank;

small enterprise, any legal entity with neither annual turnover exceeding one hundred million BIF, nor total deposits exceeding one hundred million BIF, nor total credits exceeding one hundred million BIF;

financial companies, credit institutions, insurance companies, pension funds, microfinance institutions, exchange offices, financial guarantee companies and payment institutions;

non-financial company, any other legal entity not belonging to the financial companies category.

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Article 3: Liquidity Ratio Standards

Banks must permanently maintain a short-term liquidity ratio of at least 100%, calculated as the ratio between, on the one hand, their stock of High-Quality Liquid Assets (HQLA) and, on the other hand, the total net cash outflows over the following 30 calendar days, under a severe liquidity stress scenario.

Banks must comply with the minimum short-term liquidity ratio standards established respectively in BIF and foreign currencies, calculated in accordance with the formula set out in Article 4 below.

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Article 4: Components of the Short-Term Liquidity Ratio (STLR)

The STLR consists of two elements:

a. In the numerator, the stock of HQLA; b. In the denominator, the total net cash outflows over the following 30 calendar days.

It is calculated as follows:

[ \frac{\text{Stock of High-Quality Liquid Assets}}{\text{Total net cash outflows over 30 calendar days following}} \geq 100% ]

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CHAPTER II: HIGH-QUALITY LIQUID ASSETS

Article 5: Characteristics and Requirements for HQLA

a) HQLA must be easily and immediately convertible into liquidity without or with little loss of value during periods of severe liquidity stress;

b) Assets issued by local financial companies are excluded from the HQLA stock;

c) Balances with domestic banks are excluded from the HQLA stock but these balances are taken into account in cash inflows;

d) HQLA must be free from any legal, regulatory or contractual constraints limiting the bank's ability to dispose of them within a 30-day horizon;

e) Liquid assets received under repurchase agreements are eligible as HQLA, provided they are not re-used as collateral and are legally and contractually at the bank's disposal;

f) The HQLA stock must be under the control of a function specifically responsible for liquidity management, authorized to convert it into liquidity and possessing the operational capacity to do so;

g) For the inclusion of foreign currency balances with correspondent banks in the HQLA stock, the bank must ensure, in addition to the conditions set out in Articles 9 to 11, compliance with the following conditions:

• correspondent banks are diversified,
• there is no obstacle to fund transfers,
• the bank can withdraw funds from correspondent banks unconditionally;

h) Listed assets on an organized market must be included in HQLA at their market value;

i) Negotiable securities referred to in Articles 9 and 11 must meet high credit quality and liquidity requirements. Credit quality is assessed based on rating, and for liquidity, securities must be traded on organized, deep and active markets;

j) Banks holding assets in foreign banks must transmit to the Central Bank, at the end of each month, the external rating of their foreign correspondents. Failure to provide the Central Bank with updated ratings of foreign correspondents results in excluding these balances from HQLA.

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Article 6: Treatment of an Asset That Has Lost Its HQLA Eligibility

When an asset loses its eligibility in HQLA, for example due to a rating downgrade below the threshold, a bank is authorized to keep this asset within the HQLA stock for 30 days. Beyond this period, the asset can no longer be included in the HQLA stock.

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Article 7: HQLA Structure

HQLA are composed of Level 1 and Level 2 assets. Only assets free from any encumbrance held by the bank on the calculation date of the liquidity ratio are included in each category.

The STLR stock of HQLA in BIF comprises only Level 1 assets in BIF defined in Article 8.

The STLR stock of HQLA in foreign currencies includes Level 1 assets in foreign currencies, provided for in Article 9, and Level 2 assets composed of Level 2A and 2B HQLA in foreign currencies defined in Articles 10 and 11.

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Article 8: Composition and Weighting of HQLA in BIF

HQLA in BIF correspond to the following assets:

a) Cash balances, weighted at 100%; b) Balances with the Central Bank net of mandatory reserves, weighted at 100%; c) Burundi Treasury bills maturing within one month, weighted at 100%; d) Burundi Treasury bills maturing in more than one month, weighted at 90%; e) Burundi Treasury bills received under repurchase agreements maturing within one month, weighted at 100%; f) Burundi Treasury bills received under repurchase agreements maturing in more than one month, weighted at 90%.

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Article 9: Composition and Weighting of Level 1 Foreign Currency HQLA

Level 1 foreign currency HQLA correspond to the following assets:

a) Cash balances; b) Balances with the Central Bank net of mandatory reserves; c) Balances with foreign banks rated AAA to AA-, net of provisions for documentary credits; d) Negotiable securities issued or guaranteed by foreign states and public administrations rated AAA to AA-. These securities must be traded on deep and active markets characterized by a low level of concentration; e) Negotiable securities issued or guaranteed by foreign central banks and financial institutions rated AAA to AA-. These securities must be traded on deep and active markets characterized by a low level of concentration.

All these Level 1 foreign currency HQLA are weighted at 100%.

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Article 10: Composition and Weighting of Level 2A Foreign Currency HQLA

a) Negotiable securities issued or guaranteed by foreign states and public administrations rated A+ to A-. These securities must be traded on deep and active markets characterized by a low level of concentration; b) Negotiable securities issued or guaranteed by foreign central banks and financial institutions rated A+ to A-. These securities must be traded on deep and active markets characterized by a low level of concentration.

Level 2A foreign currency HQLA are weighted at 85%.

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Article 11: Composition and Weighting of Level 2B Foreign Currency HQLA

Level 2B foreign currency HQLA correspond to:

• balances with foreign banks rated A+ to BBB-, net of provisions for documentary credit;

• balances with unrated foreign banks, net of provisions for documentary credit;

• Negotiable securities issued or guaranteed by foreign states and public administrations rated BBB+ to BBB-. These securities must be traded on deep and active markets characterized by a low level of concentration;

• Negotiable securities issued or guaranteed by foreign central banks and financial institutions rated BBB+ to BBB-. These securities must be traded on deep and active markets characterized by a low level of concentration.

Level 2B foreign currency HQLA are weighted at 50%.

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Article 12: Limits on Level 2 Foreign Currency HQLA

The cumulative amount of Level 2 assets is taken into account within a maximum limit of 40% of the total amount of foreign currency HQLA.

The cumulative amount of Level 2B assets is taken into account within a maximum limit of 15% of the total amount of foreign currency HQLA.

These limits of 40% and 15% must be determined after applying the weightings set out in Articles 9 to 11.

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CHAPTER III: CASH OUTFLOWS

Article 13: Cash Outflows

Cash outflows are calculated by multiplying the balances of different types of balance sheet liabilities and off-balance sheet commitments by their expected withdrawal or disbursement rates over 30 calendar days in a liquidity stress scenario, in accordance with the provisions of Articles 14 to 19 of this circular.

Flows related to general operating expenses are not taken into account in cash outflows.

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Article 14: Unsecured Received Funding

Deposits from individuals with demand and term maturities of one hundred million BIF (Burundian Francs) or less are weighted at 10%.

Deposits from individuals with demand and term maturities exceeding 100 million BIF are weighted at 40%.

Deposits from legal entities with demand and term maturities are weighted according to the following rates:

• 10% for deposits from small enterprises;
• 25% for operational deposits;

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40% for deposits from other non-financial companies, public administrations, states, central banks and foreign financial institutions;

100% for deposits from financial companies.

A weighting rate is applied:

• 100% for cancelled deposits of which the bank has been notified;

• 0% for deposits earmarked for financing pre-identified projects provided that no drawdown on said deposits is expected within the following 30 calendar days;

• 0% for pledged deposits used to secure a credit, under the following conditions:

  • the credit term does not occur within the next 30 days;
  • the pledge contract or credit agreement explicitly stipulates the prohibition of early repayment of the credit;
  • the deposit amount cannot exceed the outstanding balance of the credit; any excess of the deposit over the credit is weighted at one of the rates set out in paragraphs 1, 2 or 3 of this article.

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Article 15: Received Funding (Secured) Maturing Within 30 Days

Repo operations maturing within a 30-day period are weighted at the following rates:

• 0% for received funding secured by Burundi Treasury bills maturing within one month;
• 0% if the lender is a central bank;
• 0% for received funding secured by Level 1 HQLA other than Burundi Treasury bills;
• 10% for received funding secured by Burundi Treasury bills maturing in more than one month;
• 15% for received funding secured by Level 2 liquid assets;
• 25% for received funding secured by HQLA that are neither Level 1 nor Level 2, whose counterparty is a state, public administration or multilateral development bank;
• 50% for received funding secured by Level 2B liquid assets;
• 100% for received funding secured by assets other than those eligible for HQLA.

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Article 16: Other Payables Maturing Within 30 Days

Other payables, not covered in Articles 13 to 15, maturing within 30 days are weighted at 100%.

These payables consist notably of unsecured borrowings, accrued interest payable on various received funding, pending payments, and dividends to be paid.

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Article 17: Provided Financing Commitments

Provided financing commitments, including the portion of undrawn credit lines, are weighted according to the following rates:

• 5% for confirmed commitments in favor of individuals and small enterprises;
• 10% for confirmed commitments in favor of non-financial companies, states, central banks, foreign financial institutions and public administrations;
• 40% for confirmed commitments in favor of financial companies.

Commitments may be deducted from any HQLA held by the bank as collateral if the bank is legally authorized to mobilize this collateral itself after using the commitment and possesses the necessary operational capacity to do so, provided that the collateral is not included in the HQLA stock.

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Article 18: Provided Guarantee Commitments

Provided guarantee commitments are weighted at 5%.

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Article 19: Other Off-Balance Sheet Cash Outflows

Other cash outflows related to off-balance sheet commitments payable within 30 days are weighted at 100%.

They consist notably of amounts to be delivered in BIF or foreign currencies as part of spot and forward foreign exchange operations maturing within 30 calendar days, the deficit to be covered as part of maintaining the foreign exchange position, and any other cash outflows resulting from a contract or agreement signed between the bank and its counterparties to be executed within 30 days.

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CHAPTER IV: CASH INFLOWS

Article 20: Cash Inflows

Cash inflows are calculated by multiplying the balances of different types of contractual receivables by their expected collection rates over 30 days in a liquidity stress scenario, in accordance with the provisions of Articles 21 to 26 below.

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Article 21: Requirements for Inflows

The only eligible cash inflows are contractual inflows linked to current exposures that are perfectly productive and for which the bank has no reason to anticipate a collection default within the 30-day period.

The following are not taken into account in cash inflows:

• any asset integrated at the HQLA level;
• conditional fund inflows as well as cash inflows related to overdrafts and credit lines granted to customers;
• financing and liquidity commitments provided by a bank other than the parent company;
• flows related to non-financial revenues.

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Article 22: Provided Funding Secured by Non-HQLA Assets Maturing Within 30 Days

Expected inflows on receivables held by the bank maturing within a 30-day period are weighted at the following rates:

• 100% for healthy receivables from financial companies;
• 100% for healthy receivables from central banks;
• 50% for healthy receivables from other legal entities;
• 50% for healthy receivables from individuals.

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Article 23: Provided Funding Secured by HQLA

Depending on the type of guarantee, expected inflows on received funding maturing within a 30-day period are weighted at:

• 0% for expected inflows on funding secured by Level 1 HQLA;
• 0% for expected inflows on funding secured by Burundi Treasury bills maturing within 30 days;

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10% for expected inflows on funding secured by Burundi Treasury bills maturing in more than 30 days;

15% for expected inflows on funding secured by Level 2A HQLA;

50% for expected inflows on funding secured by Level 2B HQLA.

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Article 24: Balances with Domestic Banks

Balances with domestic banks are weighted at 100%.

However, operational deposits held in domestic banks are weighted at 0%.

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Article 25: Received Financing Commitments

Financing commitments received by the bank are not taken into account in cash inflows except those received from the parent company and meeting the following conditions:

• commitments must be subject to a duly dated and signed contract, containing irrevocability and on-demand availability clauses;
• there are reasons justifying that cash inflows will occur even in a liquidity stress situation.

Banks include financing commitments meeting the above criteria in cash inflows with a weighting rate of 40%.

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Article 26: Other Contractual Cash Inflows to be Received

Other contractual cash inflows, not covered in Articles 20 to 25, to be received within 30 days are weighted at 100%. These include pending collections related to operations with banks and similar institutions, certified checks to be collected related to customer operations, net cash inflows associated with derivatives, and dividends to be collected within 30 days.

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CHAPTER V: NET CASH OUTFLOWS

Article 27: Components of Net Cash Outflows

The total net cash outflows reported in Article 4 for the STLR calculation is equal to the total expected cash outflows minus the total expected cash inflows at a 30-day horizon in a liquidity stress scenario.

The total expected cash inflows are capped at 75% of the total expected cash outflows. Consequently, banks are required to hold an HQLA stock of at least 25% of the total expected cash outflows.

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CHAPTER VI: FINAL PROVISIONS

Article 28: Cases of STLR Below the Standard

In case of declaration to the Central Bank of an STLR below the minimum standard, the bank must notify in writing the reasons for non-compliance with the STLR standard and the measures the bank commits to implement to return within the regulatory minimum standard limits within a reasonable timeframe. These measures must be approved by the Central Bank.

When events occur that may cause the STLR to fall below the minimum level of 100% before the declaration deadline, the bank must immediately inform the Central Bank in writing.

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Article 29: Requirement for an STLR Above the Minimum Standard

The Central Bank may require a bank to maintain an STLR level above the minimum standard of 100% based on its risk profile.

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Article 30: Data Availability Obligations

Banks must have data on:

• contractual and expected maturities of their assets and liabilities;
• forecasts of cash inflows and outflows over different horizons (day-by-day, weekly, monthly).

The Central Bank may require that this data be transmitted to it whenever it deems necessary.

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Article 31: Obligation to Register Commitments

Banks are required to register all off-balance sheet commitments, including undrawn credit lines, in the appropriate sections of the master file in accordance with the banking accounting plan.

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Article 32: Frequency and Transmission Deadline

Banks must submit monthly to the Central Bank a declaration of the short-term liquidity ratio in BIF and foreign currencies in accordance with Annexes I and II of this circular. The declaration statement must be finalized on the last day of each month and transmitted to the Central Bank no later than the 5th calendar day of the following month.

The Central Bank may request at any time that a bank transmit to it the short-term liquidity ratio calculated on a specific date and within a transmission deadline set by the Central Bank.

Data related to remaining contractual maturities on assets and liabilities must be transmitted to the Central Bank, in accordance with Annexes III and IV, within fifteen days following the end of each quarter.

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Article 33: Entry into Force

This circular replaces Circular No. 04/2013 of April 26, 2013 and enters into force on the day of its publication on the Central Bank's website and in the Official Gazette of Burundi.

Done at Bujumbura, on August 17, 2018

Jean CIZA
Governor.

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1. Government Avenue - P.O.B. 705 BUJUMBURA - Tel: (257) 22-20 40 00 / 22 22 27 44 - Fax: (257) 223128 - Email: brb@brb.bi

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ANNEX I TO CIRCULAR NO. 04/2018

BANK:

DOCUMENT: SHORT-TERM LIQUIDITY RATIO