Chapter Fifteen

1 Emergency Liquidity Instructions

With reference to the Central Bank and Banking System Law issued by Law No. 194 of 2020 and in implementation of its provisions, and given the important role that central bank liquidity plays in containing potential crises and mitigating their impact, and in order to establish a clear and effective framework for this type of financing, including defining its terms and procedures in advance, the CBE Board of Directors, in its meeting held on January 4, 2022, approved the issuance of the attached general framework for emergency liquidity instructions.

-1 Introduction:

Emergency liquidity provision operations are considered one of the tools available to central banks to support and assist banks in facing short-term liquidity crises, given the threat these crises pose to the continuity of banks' business and their potential impact on other financial institutions. The global financial crisis has highlighted the importance of central banks establishing a clear and effective framework for emergency liquidity, as defining its terms and procedures in advance enhances banks' readiness to deal with potential liquidity crises, which supports maintaining the soundness of the banking sector and the confidence of its stakeholders.

It should be noted that emergency liquidity provision operations differ from monetary policy operations such as open market operations, which the central bank uses to absorb or inject liquidity at the banking sector level and influence the money supply, as well as from other liquidity instruments provided by the central bank, such as overnight facilities, which primarily aim to maintain the soundness and smooth functioning of payment systems. These instructions have been prepared in line with the following main principles:

• Emergency liquidity provision shall be limited to financially sound banks.

• Emergency liquidity provision shall be against sufficient collateral.

• The applicable interest rate shall be higher than the average market lending rates.

Letter from the Governor of the Central Bank of Egypt dated January 10, 2022 1

• The financing shall be short-term.

-2 General Rules:

1-2 The Central Bank may provide emergency liquidity financing as a lender of last resort if a bank is unable to meet its liquidity needs from the interbank market or other financial markets, in accordance with the controls stipulated in these instructions.

2-2 The use of emergency liquidity to finance dividend distributions, share buybacks, bonuses for board members or employee distributions, or to finance parties related to the bank is prohibited.

3-2 The Central Bank may disclose the emergency liquidity provided to any bank when necessary to maintain financial stability and support the confidence of stakeholders in the banking sector.

4-2 Emergency liquidity provision operations do not preclude the Central Bank's right to take any other legally authorized measures.

5-2 The bank receiving emergency liquidity is obligated to provide the Central Bank with a monthly report clarifying the following:

1-5-2 Its compliance with the financial soundness criteria set forth in Clause 1-3 or the restructuring plan referred to in Clauses 1-3 and 2-3. 2-5-2 All assets that the bank can use as collateral as described in Clause 4. 3-5-2 All developments and measures taken by the bank to restore its liquidity position to a stable state.

6-2 The bank receiving emergency liquidity is subject to strict supervision by the Central Bank, including, but not limited to, the following:

1-6-2 Daily monitoring of the bank's liquidity position (including emergency liquidity). 2-6-2 Weekly provision of a maturity ladder statement to the Central Bank to monitor any changes in the size of gaps. 3-6-2 Provision to the Central Bank of approval from the bank's Assets and Liabilities Committee before granting any new loans or credit facilities or increasing existing limits. 4-6-2 Provision to the Central Bank of relevant reports prepared by the Board's committees and the Risk and Internal Audit departments. 5-6-2 Meeting with senior management or the bank's board of directors when deemed necessary by the Central Bank.

-3 Financial Soundness Criteria:

1-3 Emergency liquidity shall be provided only to financially sound banks. To be considered financially sound within the framework of these instructions, a bank must either meet the following criteria or submit a plan to meet them within a maximum period of 6 months, subject to the approval of the Central Bank:

1-1-3 The Common Equity Tier 1 capital shall not be less than 4.5%. 2-1-3 Tier 1 capital shall not be less than 6%. 3-1-3 The total capital adequacy ratio + capital conservation buffer shall not be less than 12.5%. 4-1-3 The bank shall not be in liquidation or subject to any of the circumstances under which the bank is considered distressed. 5-1-3 There shall be no indication of the bank's potential future distress, according to the Central Bank's study of the bank's current and expected performance indicators.

2-3 In the event that the controls specified in Clause 1-3 are not met, the Central Bank may provide emergency liquidity as an agent for the government, subject to the same controls stipulated in these instructions, in addition to the following conditions:

1-2-3 Providing the support must be necessary to maintain the soundness of the banking system, according to the Central Bank's study. 2-2-3 The Ministry of Finance must approve providing a legal guarantee to the Central Bank, undertaking to provide the financial allocation for the entire financing provided. 3-2-3 Submission of a plan approved by the bank's board of directors outlining its ability to continue, restructure, merge, or restore its financial soundness within a period acceptable to the Central Bank.

-4 Conditions for Acceptable Collateral When Providing Emergency Liquidity Financing:

1-4 Acceptable collateral shall be limited to securities and financial instruments issued by the Egyptian government. The CBE Board of Directors may approve other types of collateral.

2-4 A discount rate shall be determined for the provided collateral based on its type and maturity, in light of the Central Bank's study of each case, taking into account that the present value of the collateral after the discount equals or exceeds the value of the emergency liquidity provided to the bank, and that the maturity of the provided collateral is not less than the period set for emergency liquidity financing.

3-4 The coverage ratio (collateral value / emergency liquidity value) shall be determined according to the bank's financial position and risk level, provided that this ratio is not less than 100%.

4-4 The collateral shall be deposited with the Central Bank or any other entity designated by the Central Bank in accordance with its board of directors' decision. In the event that the bank is unable to repay after the financing period expires or the Central Bank refuses to extend the financing period, the Central Bank has the right to liquidate the collateral provided by the bank and use it to repay the emergency liquidity financing, with any excess, if any, added to the bank's accounts with it.

-5 Pricing of Emergency Liquidity Financing:

The Central Bank provides emergency liquidity against an interest rate higher than the average market interest rates, to encourage banks to use it temporarily and limit reliance on it as a regular financing tool, ensuring that it achieves its intended objectives. The interest rate shall be determined as follows:

The interest rate shall reflect market risks, calculated as the Central Bank's overnight lending rate + a margin determined by the CBE Board of Directors (minimum 5%).

-6 Duration of Emergency Liquidity Financing:

1-6 Emergency liquidity financing shall be provided for short-term periods according to the bank's needs, with a maximum duration of 180 days. The financing may be extended or part of it may be extended for another period or periods, depending on the bank's financial position and repayment capacity, and its need for liquidity, provided that the total financing duration does not exceed one year.

2-6 The CBE Board of Directors may, in case of approving the extension of the emergency liquidity period, amend the financing terms (e.g., discount rate or coverage ratio). Banks must provide the necessary collateral in accordance with the financing terms after renewal. The extension shall be at the same applicable interest rate.

-7 Procedures and Documents Required to Obtain Emergency Liquidity Financing:

1-7 The bank shall submit a request to the Central Bank to obtain emergency liquidity financing according to the form prepared for this purpose, attaching the following minimum required documents and data, after their approval by the bank's board of directors:

1-1-7 The reasons for the bank's need for emergency liquidity financing, as well as the reasons for the bank's inability to meet its needs from the interbank market or other financial markets, specifying all sources of liquidity that were resorted to, including the bank's main shareholders. 2-1-7 A detailed financing plan outlining the steps and procedures to be taken to restore the bank's liquidity position to a stable state within the financing period, in addition to expected repayment sources, and an analysis of cash flows arising from on- and off-balance sheet items. This plan must include a moderate scenario and a severe scenario regarding the bank's recovery of its liquidity position. 3-1-7 The amount of emergency liquidity required and its duration and uses, in accordance with the bank's needs and the financing plan referred to in Clause 2-1-7. 4-1-7 The collateral available to the bank that can be used to secure the financing and its value. 5-1-7 Information demonstrating the bank's compliance with the financial soundness criteria set forth in Clause 1-3 according to its latest available financial position, as well as its ability to adhere to these criteria throughout the emergency liquidity period, or information demonstrating compliance with the restructuring plan referred to in Clauses 1-3 and 2-3. 6-1-7 The bank's projected financial statements for at least one year (divided into quarterly periods) and the assumptions used, taking into account all changes that may affect the bank's liquidity and capital position.

2-7 The information and data mentioned above shall be studied, and the matter shall be presented to the CBE Board of Directors to make a decision regarding the provision of emergency liquidity financing.

3-7 In the event that the CBE Board of Directors approves the provision of emergency liquidity financing, an agreement shall be signed between the Central Bank and the concerned bank, including all terms and procedures set forth in these instructions, including the collateral deposit mechanism, before the financing is made available to the bank.

4-7 In the event that the bank wishes to extend the financing period, it must submit all the documents and data referred to in Clause 1-7 to the Central Bank at least 15 days before the expiration of the financing period, stating the reasons for the bank's inability to restore its liquidity position to a stable state according to the plan referred to in Clause 2-1-7.