Circular CBFA_2010_21 / Liquidity Risk Management

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Circular CBFA_2010_21 of September 30, 2010
Liquidity Risk Management

Scope:
Credit institutions, financial companies, liquidation bodies, and bodies assimilated to liquidation bodies.

Summary/Objectives:
The CBFA establishes, effective January 1, 2011, quantitative regulatory liquidity standards applicable to Belgian credit institutions, Belgian branches of foreign credit institutions, financial companies, liquidation bodies, and bodies assimilated to liquidation bodies, as a precursor to the introduction of international standards in this area. These quantitative regulatory liquidity standards are based on the 'stress test' ratio that the CBFA has used since 2009 as an observation ratio. This circular provides details on the CBFA Regulation of July 27, 2010 (approved by Royal Decree of September 3, 2010), which establishes these quantitative liquidity standards. It otherwise incorporates the provisions set out in Circular CBFA_2009_18 of May 8, 2009, regarding the CBFA's updated expectations concerning sound practices for liquidity risk management, as well as regarding the intensified reporting to be carried out by the concerned institutions concerning their liquidity position. This circular replaces Circular CBFA_2009_18 of May 8, 2009, effective January 1, 2011.

Structure:

1. Introduction and context.
2. Establishment of quantitative regulatory liquidity standards.
3. CBFA expectations concerning sound practices for liquidity risk management.
4. Frequency and reporting deadlines.

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Madam,
Sir,

1. Introduction and context
   By adopting Circular CBFA_2009_18 of May 8, 2009, regarding liquidity risk management, the Banking, Finance and Insurance Commission (hereinafter "CBFA") refined its prudential approach to the liquidity risk incurred by credit institutions, financial companies, liquidation bodies, and bodies assimilated to liquidation bodies, following up on initiatives it had previously taken. Thus, it put in place observation ratios intended to monitor the liquidity position of these institutions based on existing prudential reporting, updated its expectations concerning sound practices for liquidity risk management based on international standards themselves reviewed, and intensified the monitoring of the liquidity position of Belgian credit institutions and financial companies.

Circular CBFA_2009_18 of May 8, 2009 provided that the impact of the measures taken would be evaluated for the first time during the last quarter of 2009, in light of economic developments and the evolution of international consultation conducted by supervisory authorities on the prudential approach to liquidity risk management by credit institutions. Having carried out this evaluation, the CBFA intends to establish, effective January 1, 2011, quantitative regulatory liquidity standards applicable to Belgian credit institutions, Belgian branches of foreign credit institutions, financial companies, liquidation bodies, and bodies assimilated to liquidation bodies, as a precursor to the introduction of international standards in this area. This circular provides, in point 2, details on the regulation establishing these quantitative liquidity standards. It incorporates, in points 3 and 4, the other measures set out in Circular CBFA_2009_18 of May 8, 2009, which it will replace effective January 1, 2011.

2. Establishment of quantitative regulatory liquidity standards
   The CBFA establishes, effective January 1, 2011, quantitative regulatory liquidity standards to monitor the liquidity position of Belgian credit institutions, Belgian branches of foreign credit institutions, financial companies, liquidation bodies, and bodies assimilated to liquidation bodies. To this end, it adopted a regulation 1 which determines the quantitative liquidity standards applicable to these institutions. This regulation, dated July 27, 2010, was approved by a Royal Decree of September 3, 2010, and published in the Belgian Monitor on September 16, 2010. It is attached as annexes CBFA_2010_21-1 and CBFA_2010_21-2 to this circular.

The quantitative regulatory liquidity standards are based on the stress test ratio that the CBFA has used since 2009 as an observation ratio. This stress test ratio aims to determine the extent to which the liquidity position of the concerned institutions is sufficiently robust to withstand the impact of exceptional circumstances, defined in a stress scenario (a combination of an institution-specific liquidity crisis and a general liquidity crisis). The stress test ratio compares the available liquidity at an institution under these exceptional circumstances (denominator of the stress test ratio) with the required liquidity at less than one week and at less than one month at the institution under these circumstances (numerator of the stress test ratio). The CBFA calculates the stress test ratio based on the liquidity data transmitted to it by the concerned institutions (reporting tables 90.31 and 90.32). The manner in which this stress test ratio was established aligns with the 'best practices' defined by supervisory authorities in neighboring countries and aligns with international proposals aimed at introducing harmonized quantitative liquidity standards.

The annex to the regulation of July 27, 2010 describes in detail the method for calculating the available liquidity at an institution under exceptional circumstances (denominator of the stress test ratio) and the required liquidity at less than one week and at less than one month at the institution under these circumstances (numerator of the stress test ratio).

1 CBFA Regulation of July 27, 2010 regarding the liquidity of credit institutions, financial companies, liquidation bodies, and bodies assimilated to liquidation bodies.

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The regulation of July 27, 2010 regarding the liquidity of credit institutions, financial companies, liquidation bodies, and bodies assimilated to liquidation bodies provides that the available liquidity at an institution under exceptional circumstances must always be greater than or equal to the required liquidity at less than one week and at less than one month at the institution under these circumstances. The stress test ratio of the concerned institution must therefore permanently be less than or equal to 100% for positions at less than one week and at less than one month, and this on a consolidated basis for financial companies, both on an individual basis and on a consolidated basis for Belgian credit institutions 2 as well as for liquidation bodies and bodies assimilated to liquidation bodies, and on a territorial basis for Belgian branches of foreign credit institutions. A stress test ratio less than or equal to 100% means that the institution is capable of facing the extreme circumstances of the stress scenario without having to call upon emergency liquidity support. By establishing these quantitative regulatory liquidity standards as a precursor to the introduction of international liquidity standards, the CBFA intends to evolve its monitoring of the liquidity of the concerned institutions in the direction of the international consensus on this matter.

Since the quantitative regulatory liquidity standards are applied both on a consolidated basis and on an individual basis for Belgian credit institutions, the CBFA expects these institutions to have an acceptable liquidity position, both at the consolidated level and at the individual level (that is to say, at the level of the Belgian credit institution taken separately).

The CBFA will take prudential measures regarding an institution to bring it to improve its liquidity position or its liquidity management if this proves necessary based in particular - but not exclusively - on the aforementioned quantitative regulatory liquidity standards. In accordance with Article 43 of the Law of March 22, 1993, regarding the status and supervision of credit institutions, and Article 13 of the Royal Decree of September 26, 2005, regarding the status of liquidation bodies and bodies assimilated to liquidation bodies, the CBFA may, in special cases, grant derogations to institutions whose aforementioned regulatory liquidity ratios exceed, after January 1, 2011, the standard of 100%. This may notably be the case of an institution that has used its liquidity buffers in extreme circumstances or the case of an institution that experiences a structural exceedance of the standard due to its specific business model. Any institution that exceeds the aforementioned standard must inform the CBFA without delay, explaining the reasons for the exceedance, indicating its probable duration, and describing the measures that will be taken to satisfy the standard again. The CBFA may, when authorizing a (temporary) derogation from the quantitative regulatory liquidity standards, subordinate this derogation to the respect of additional conditions (for example, a more frequent reporting frequency, the activation of the institution's emergency plan regarding liquidity, etc.).

Regarding the application of the quantitative regulatory liquidity standards on a consolidated basis, institutions continue to have the choice to leave the liquidity position of certain Belgian or foreign subsidiaries outside the consolidation scope by not including them in the liquidity reporting (tables 90.31 and 90.32), in accordance with the provisions of Article 2, § 5, of the regulation of July 27, 2010 regarding the liquidity of credit institutions, financial companies, liquidation bodies, and bodies assimilated to liquidation bodies.

3. CBFA expectations concerning sound practices for liquidity risk management
   The CBFA continues to apply the international qualitative principles regarding liquidity risk management, reviewed in 2008 by the Basel Committee, to determine its expectations concerning sound practices for liquidity risk management in Belgian credit institutions, Belgian branches of foreign credit institutions, financial companies, liquidation bodies, and bodies assimilated to liquidation bodies. Like other members of the Basel Committee and other supervisory authorities applying the international principles established by it, the CBFA has updated its qualitative expectations, as established in circular PPB-2006-17-CPB regarding the liquidity management of institutions. It based itself on this on the best practices recommended by the Basel Committee in the document titled "Principles for Sound Liquidity Risk Management and Supervision", published in September 2008. You will find this document in annex CBFA_2010_21-3 3 of this circular. The CBFA proceeds with the qualitative evaluation of the adequacy of the internal organization of liquidity management by verifying compliance with these principles. The aforementioned Basel Committee principles constitute an update of the "Sound Practices for Managing Liquidity in Banking Organisations" which it published in February 2000 and which the CBFA used as a guide until 2009 4.

2 Belgian credit institutions that are parent companies but also subsidiaries of other Belgian credit institutions subject to liquidity requirements based on their consolidated situation are only required to comply with the liquidity requirements provided by the regulation of July 27, 2010 on the basis of their individual situation.

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4. Frequency and reporting deadlines
   Finally, the CBFA maintains more intensive monitoring of the liquidity position of Belgian credit institutions and financial companies. The frequency of liquidity reporting (reporting tables 90.31-32-33) therefore remains higher, with reporting carried out on a monthly basis and no longer on a quarterly or semi-annual basis. Specifically, the CBFA expects Belgian credit institutions and financial companies to transmit each month the periodic reporting tables 90.31, 90.32 and, where applicable, 90.33 containing detailed information on the institution's liquidity position, and this both on an individual basis and on a consolidated basis. The reporting covers the liquidity position determined at the end of the month, after processing all operations. The reporting deadline remains fixed at 15 banking business days from the reporting date for tables 90.31 and 90.32 on an individual basis, and at 1 month and 7 calendar days from the reporting date for tables 90.31, 90.32 and 90.33 on a consolidated basis to be transmitted by Belgian credit institutions that prepare consolidated accounts and by financial companies 5.

Belgian branches of foreign credit institutions as well as liquidation bodies and bodies assimilated to liquidation bodies continue to transmit tables 90.31, 90.32 and, where applicable, 90.33 on a quarterly basis. The aforementioned reporting deadlines do not apply to them.

To allow for better quality control, additional validation tests have furthermore been established for liquidity reporting (tables 90.31-33) of all reporting institutions. These additional validation rules have been applied since the reporting covering the situation as of June 30, 2009. You will find on the CBFA website (http://www.cbfa.be/fr/ki/circ/pdf/cbfa_2010_19_validation.xls) an updated list of the validation rules applicable since the reporting covering the situation as of June 30, 2009.

The provisions of this circular modify on certain points the policy adopted by the CBFA in its circular PPB-2006-17-CPB. They must therefore be read as a complement to it.
The CBFA intends to evaluate the measures taken and their impact continuously, in light of economic developments and the evolution of international consultation conducted by supervisory authorities on the prudential approach to liquidity risk management by credit institutions.
The CBFA adheres to and actively collaborates in the development of harmonized quantitative liquidity standards internationally and will, upon the introduction of these standards, coordinate its provisions regarding liquidity management.

3 "Principles for Sound Liquidity Risk Management and Supervision", Basel Committee on Banking Supervision, September 2008.
4 Specifically, this means that the reference made, in chapter 2, section 2, paragraph 2.1, of the annex to circular PPB-2006-17-CPB of December 20, 2006, to the document published by the Basel Committee in February 2000 is replaced by a reference to the document titled "Principles for Sound Liquidity Risk Management and Supervision", published in September 2008. Likewise, the enumeration of principles regarding sound practices for liquidity risk management, appearing in chapter 2, section 2, paragraph 2.4, of the annex to this same circular, must be replaced by the updated enumeration of the CBFA's expectations in this matter, which is included in annex CBFA_2010_21-4 of this circular. 5 The CBFA has requested institutions that prepare consolidated accounts and who make use of the option offered by circular PPB-2006-17-CPB to communicate internal liquidity ratios applied at the group level, to also transmit the standard tables on a consolidated basis (tables 90.31, 90.32 and 90.33) every month, respecting the new reporting deadline (reduced to 1 month and 7 calendar days from the reporting date). The CBFA has furthermore requested these institutions to communicate to it every month the ratios they use internally, respecting the new reporting deadline provided.

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The aforementioned modifications do not otherwise change the fact that the CBFA can and will continue to undertake individualized prudential actions regarding certain institutions, such as daily monitoring of liquidity positions or the application of more severe or additional quantitative liquidity standards, as long as circumstances require.

A copy of this circular is transmitted to your commissioner or your approved auditor.
The annexes mentioned in this circular are available on the CBFA website.
We ask you to accept, Madam, Sir, the expression of our distinguished consideration.

The President,
Jean-Paul SERVAIS

Annexes:

• CBFA_2010_21-1 / CBFA Regulation of July 27, 2010 regarding the liquidity of credit institutions, financial companies, liquidation bodies, and bodies assimilated to liquidation bodies.
• CBFA_2010_21-2 / Annex to the CBFA Regulation of July 27, 2010 regarding the liquidity of credit institutions, financial companies, liquidation bodies, and bodies assimilated to liquidation bodies.
• CBFA_2010_21-3 / "Principles for Sound Liquidity Risk Management and Supervision", Basel Committee on Banking Supervision, September 2008.
• CBFA_2010_21-4 / Updated enumeration of the CBFA's expectations concerning sound practices for liquidity risk management.