Circular 07/2022 (BaFin) – Additional Liquidity Outflows Related to Other Products and Services under Article 23 of Delegated Regulation (EU) 2015/61

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Additional Liquidity Outflows Related to Other Products and Services under Article 23 of Delegated Regulation (EU) 2015/61

Business sign: BA 55-K 2103-2019/0001

15.08.2022

1. Introduction This circular specifies the supervisory approach regarding the application of Article 23 of Delegated Regulation (EU) 2015/61 (hereinafter “DR 2015/61”) and the corresponding reporting requirements of Implementing Regulation 2021/451 (hereinafter “IR 2021/451”) in their respective applicable versions concerning additional liquidity outflows related to other products and services that do not fall under the outflow categories of Articles 27 to 31a DR 2015/61. It further clarifies the categories of products and services mentioned in Article 23(1)(a) to (h) DR 2015/61 and in this context in IR 2021/451, and establishes the liquidity outflows attributable to these products and services. Furthermore, it concretizes the at least annual reporting required under Article 23(2) DR 2015/61 for products and services falling under Article 23(1) DR 2015/61, for which the probability and potential magnitude of liquidity outflows are significant, as well as the establishment of the liquidity outflows attributable to these products and services.

2. Applicability / Target Group This circular applies to institutions subject to Article 6(4) of Regulation (EU) No 575/2013 of the European Parliament and of the Council (“Capital Requirements Regulation”, CRR) that are classified as “less significant institutions (LSIs)” under Article 6(4) of the SSM Regulation. It also applies to all institutions treated as CRR credit institutions under Section 1a of the German Banking Act (KWG), provided they are not exempt from Part VI of the CRR.

3. Monthly Reporting of Products and Services under Article 23(1) DR 2015/61 according to IR 2021/451 The liquidity outflows of the products and services mentioned in Article 23(1) DR 2015/61 are to be considered by all institutions mentioned in Section 2 in the monthly reports under IR 2021/451, regardless of their significance. For this purpose, the amount (column 010), the applicable weighting provided for in Section 5 of this circular (column 050), and the corresponding outflow (column 060) are to be reported in reporting form C 73.00.

According to IR 2021/451, Annex XXIV, Part II, Section 1.4, the following applies to reporting form C 73.00, row 720, columns 010 and 050: “Credit institutions report here products and services in accordance with Article 23(1) of Delegated Regulation (EU) 2015/61. The amount to be reported corresponds to the maximum amount that could be drawn from the products and services mentioned in Article 23(1) of Delegated Regulation (EU) 2015/61. The applicable weighting corresponds to the weighting determined by the competent authorities in accordance with Article 23(2) of Delegated Regulation (EU) 2015/61.”

In addition to these explanations in IR 2021/451, Section 5 of this circular establishes the applicable weightings and specifies the liquidity outflows related to other products and services falling under Article 23(1)(a) to (h) DR 2015/61 or, in reporting form C 73.00 under ID 1.1.7, to be recorded in reporting rows 731 to 870.

4. Annual Reporting under Article 23(2) DR 2015/61 In addition to the monthly reports according to Section 3, an additional annual report is required for the products and services mentioned in Article 23(1) DR 2015/61, for which the probability and potential magnitude of liquidity outflows are significant, in accordance with Article 23(2) sentence 3 DR 2015/61. These reports are to be submitted by the reference date of September 30 using the reporting form published as an Excel file with this circular, and must be submitted to the supervisory authority by October 31 of the respective year.

Within these annual reports, the significant products and services are described, along with their corresponding outflow rates used internally by the institution in the stress scenario relevant for management that has the most adverse effects. Significant within the meaning of Article 23(2) sentence 3 DR 2015/61 are all products and services that, in reporting form C 73.00 according to IR 2021/451, are assigned to a category of products and services in rows 731 to 870 (ID 1.1.7.1 to ID 1.1.7.9) and for which the following applies:

Products and services in rows 731 and 770 (ID 1.1.7.1 and 1.1.7.5): The outflow to be considered in column 060 for all products and services assigned to the respective category amounts to more than 7.5% of the difference between the sum of weighted liquidity outflows of the institution to be stated in row 010, column 060 of reporting form C 73.00 and the sum of weighted liquidity outflows related to other products and services in accordance with Article 23 DR 2015/61 to be stated in row 720, column 060 of reporting form C 73.00 and more than six million euros. This means that the categories of products and services to be reported in rows i = 731 and 770 are classified as significant within the meaning of Article 23(2) sentence 3 DR 2015/61.

Products and services in rows 740, 750, 760, 780, 850, 860 and 870 (ID 1.1.7.2, 1.1.7.3, 1.1.7.4, 1.1.7.6, 1.1.7.7, 1.1.7.8 and 1.1.7.9): The outflow to be considered in column 060 for all products and services assigned to the respective category amounts to more than 0.5% of the difference between the sum of weighted liquidity outflows of the institution to be stated in row 010, column 060 of reporting form C 73.00 and the sum of weighted liquidity outflows related to other products and services in accordance with Article 23 DR 2015/61 to be stated in row 720, column 060 of reporting form C 73.00 and more than six million euros. This means that the categories of products and services to be reported in rows i = 740, 750, 760, 780, 850, 860 and 870 are classified as significant within the meaning of Article 23(2) sentence 3 DR 2015/61.

The annual report also includes products and services that (yet) do not qualify as significant within the meaning of this circular but are classified by the respective institution as significant with regard to its (future) business and risk profile.

5. Definition of Products and Services under Article 23(1) DR 2015/61 and Establishment of Corresponding Outflow Rates Article 23 DR 2015/61 serves as a catch-all provision for liquidity outflows that do not fall under Articles 27 to 31a DR 2015/61. These are predominantly liquidity outflows whose occurrence or timing is uncertain, including those where no contractual or other payment obligation of the institution exists or which can be revoked by the institution at any time. Liquidity outflows from contractually promised obligations fall under Article 23 DR 2015/61 only if they arise from circumstances other than those regulated in Articles 27 to 31a or Article 32(3)(a) DR 2015/61 (e.g., guarantees) or if, due to the specificity of their probability and potential magnitude, they are explicitly assigned to one of the following categories. Contractual, irrevocable contingent liabilities from credit and liquidity facilities are covered by Article 31 DR 2015/61. Expected liquidity outflows from contractually agreed extensions or renewals of loans to non-financial customers in the next 30 days, which exceed the liquidity outflows implicitly assumed for this customer group under Article 32(3)(a) DR 2015/61, fall under Article 31a(2) DR 2015/61. Furthermore, under Article 31a(1) DR 2015/61, all other expected liquidity outflows in the next 30 days are to be recorded that do not fall under Articles 24 to 31 DR 2015/61 and whose occurrence or timing is not uncertain as with the subsequent categories for other products and services under Article 23 DR 2015/61.

For the products and services related to other products and services under Article 23 DR 2015/61, the following is specifically established:

a) Other off-balance sheet and contingent financing obligations, including non-earmarked financing facilities (Cell 731, ID 1.1.7.1) Explanation: This category covers potential liquidity outflows not based on a legal obligation. These include, for example, non-bindingly promised, i.e., revocable within the next 30 calendar days at any time or out-of-contract credit facilities, as well as other revocable or out-of-contract commitments not covered in categories b) to i). Non-contractual contingent liabilities arise particularly in connection with or through the servicing of sold products or offered services, for which liquidity support may be required at a later date under stressed market conditions. Such obligations can arise from financial products and instruments where the bank acts as seller, sponsor, or originator and which can lead to unintended balance sheet expansions if the bank provides support for reputational reasons. This includes financial products and instruments to which the customer or buyer attaches certain expectations regarding liquidity and marketability. Potential requests for repurchase of the bank’s own debt securities or those of associated special purpose vehicles, securitisation vehicles, and other such financing facilities are also included here. Internal goodwill lines, where draws on credit or liquidity facilities exceed the limit agreed and communicated with the customer, do not fall under this category but are classified as overdraft loans according to letter e). Contractual contingent liabilities from guarantees, as well as those not related to a downgrade in rating, fall under the “Other” category according to letter i). Outflow rates: For the unutilized portion of contractually based but non-binding or terminable within the next 30 days at any time payment commitments, the following outflow rates apply: for non-financial customers according to Article 31(4) DR 2015/61: 0.10 for credit institutions: 0.40 for other supervised financial institutions: 0.40 for other customers: 1.00 For potential liquidity outflows based on goodwill or reputational reasons, particularly where no contractual or legal maximum amount can be determined, the maximum amount expected under stress conditions according to Article 5 DR 2015/61 is to be stated, to which an outflow factor of 1.00 applies.

b) Unutilized loans and book credits to large customers (Cell 740, ID 1.1.7.2) Explanation: This category covers special cases where, at the time of reporting, no binding agreement exists yet, but the institution nevertheless considers a payout or partial payout of the loan in the next 30 days as part of its liquidity and financial planning. An application case is so-called “lighthouse projects”, meaning exceptional and usually large-volume financings (e.g., of airports, power plants, and opera houses). Outflow rate: 1.00

c) Agreed but yet unutilized mortgage loans (Cell 750, ID 1.1.7.3) Explanation: Regularly not an application case. The transactions assigned to this category should only be exceptions. Contractually agreed but yet unutilized mortgage loans, for which payout is expected in the next 30 days, are reported according to Article 32(3)(a) or Article 31a DR 2015/61. Outflow rate: 1.00

d) Credit cards (Cell 760, ID 1.1.7.4) Explanation: This category covers non-bindingly promised or revocable at any time with effect within 30 days, open credit limits on credit card accounts (not debit cards), which are settled at regular intervals (usually monthly). This category also includes credit limits established internally by the institution but not communicated to the customer. Liquidity outflows from contractually promised credit limits related to credit cards, which cannot be revoked in the next 30 days, fall under Article 31 DR 2015/61. Outflow rates: communicated, revocable credit limits: 0.02 non-communicated, revocable credit limits: 0.01

e) Overdraft loans (Cell 770, ID 1.1.7.5) Explanation: This category covers non-bindingly promised or revocable at any time with effect within 30 days, open credit limits to retail customers and micro-enterprises as well as small and medium-sized enterprises (SMEs) within the meaning of Commission Recommendation 2003/361/EC. This category also includes credit limits established internally by the institution but not communicated to the customer. This applies regardless of the existence or amount of a credit balance on the respective customer account in favor of the customer. Liquidity outflows from contractually promised credit limits, which cannot be revoked in the next 30 days, fall under Article 31 DR 2015/61. Outflow rates: communicated, revocable credit limits: 0.02 non-communicated, revocable credit limits: 0.01

f) Planned outflows related to the extension or granting of new retail or large customer loans (Cells 780, ID 1.1.7.6) Explanation: Regularly not an application case. This category represents a residual item. Liquidity outflows from the obligation to provide financings to non-financial customers in the next 30 days are covered under Article 32(3)(a) DR 2015/61. If these liquidity outflows exceed the inflows from payments for amortization purposes to be considered for the counterparty group mentioned there, reporting is made with an outflow rate of 100% under Article 31a(2) DR 2015/61. Liquidity outflows from the obligation to provide financings to financial customers in the next 30 days fall under Article 31a(1) DR 2015/61. Outflow rate: 1.00

g) Planned derivative liabilities (Cell 850, ID 1.1.7.7) Explanation: Regularly not an application case. Liquidity outflows from derivatives are covered under Articles 21 and 30 DR 2015/61. Possible margin calls from already concluded derivatives are not to be considered here. Outflow rate: 1.00

h) Off-balance sheet items for trade finance (Cell 860, ID 1.1.7.8) Explanation: This category covers in particular the following products from Annex I CRR: issued and confirmed documentary credits; documentary letters of credit, where the transport documents serve as collateral, or other easily liquidatable transactions; performance guarantees (including bid and performance bonds) and guarantees that do not have the character of credit substitutes; irrevocable credit security guarantees that do not have the character of credit substitutes. Credit default swaps are not included in this category. Letters of credit, where the conditions for payout are met and the liquidity outflow is expected in the next 30 days, are covered under Article 31a(2) DR 2015/61. Outflow rates: Guarantees: 0.01 Letters of credit: 0.05

i) Other (Cell 870, ID 1.1.7.9) Explanation: This category represents a residual item. The following application cases may exist, among others: other contingent liquidity outflows, except those related to a deterioration in creditworthiness (case-by-case assessment); guarantee business according to Section 1(1) No. 8 KWG, in particular avails, sureties, and guarantees, except those for trade finance; other mortgage loans offered to the customer but not yet accepted by them; rental avails; expected outflows from allocations of subscribed issuances adjusted for their liquidity value in the LCR (Outflow = (expected allocation - liquidity value of securities according to Section 2 DR 2015/61) * 1.00). Outflow rates: Avails, sureties and guarantees: 0.01 Rental avails: 0.0025 Mortgage loans: 0.10 Outflows from allocations of subscribed issuances: 1.00 Other contingent liquidity outflows: 1.00 If the weighted outflows for certain products and services in one of the categories specified in this section exceed the significance thresholds specified in Section 4, the institution has the option to provide evidence that, under stress conditions according to Article 5 DR 2015/61, an outflow rate is expected for individual products and services covered by this circular that lies below the outflow rate established in this section for these products and services. The data basis used to determine the institution-specific outflow rate should reflect a severe stress scenario. It, along with the underlying calculation methodology including the assumptions made therein, must be adequately documented and disclosed to the supervisory authority. The application of a lower outflow rate requires prior approval by BaFin.

6. Entry into Force This circular enters into force upon publication. The innovations in Section 5 of the circular compared to Circular 12/2021 (BaFin) are to be applied for the first time as of March 31, 2023.

On behalf of the Board Güldner

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