Chapter Four: Liquidity Risk Management

Section Three: Liquidity Ratios According to Basel III Resolutions

1. The "Liquidity Coverage Ratio (LCR)" and "Net Stable Funding Ratio (NSFR)"

First: The General Framework

-1 Introduction

In the context of the Central Bank of Egypt's commitment to applying the latest international practices in the Egyptian banking sector, in line with the efforts of the Basel Committee on Banking Supervision to enhance competitiveness and fortify the banking sector against potential financial crises during 2013 and 2014 respectively, and to update previous issuances regarding the liquidity ratios "Liquidity Coverage Ratio (LCR)" and "Net Stable Funding Ratio (NSFR)," it was decided to apply liquidity risk management instructions within the framework of Basel III resolutions. These instructions include the gradual application of the Liquidity Coverage Ratio (LCR) to reach 100% in 2019, and the Net Stable Funding Ratio (NSFR) directly with a minimum of 100%.

-2 Scope of Application

These instructions apply to all banks operating in the Arab Republic of Egypt, including branches of foreign banks. Banks are required to prepare both the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR) on an individual basis (branches of the bank domestically and abroad) within the first two months of each quarter, and on an individual and/or consolidated basis (including the banking group, the bank, all its branches domestically and abroad, and all affiliated financial companies except insurance companies) at the end of the quarter. These instructions shall apply from the end of July 2016.

Banks must apply the Liquidity Coverage Ratio (LCR) gradually for both the local currency and foreign currencies separately, according to the following schedule:

2019	2018	2017	2016
100%	90%	80%	70%

Letter from the Governor of the Central Bank of Egypt dated July 20, 2016

Meanwhile, banks must comply immediately with a minimum of 100% for the Net Stable Funding Ratio (NSFR) at the aggregate level for all currencies (local and foreign currencies combined), and for both the local currency and foreign currencies separately, within a maximum period of three months from the end of July 2016.

In case of non-compliance with the prescribed limits for the liquidity ratios and failure to take appropriate corrective steps (such as restructuring assets and liabilities) through a timeline specified by the bank in agreement with the Supervision and Oversight Sector, the following actions will be taken:

• In case of a shortfall in the Liquidity Coverage Ratio (LCR), funding sources equivalent to the amount of the shortfall must be provided at the level of High-Quality Liquid Assets (HQLA) and invested within those assets.

• In case of a shortfall in the Net Stable Funding Ratio (NSFR), the bank is required to form capital equivalent to the amount of the shortfall as additional capital in the capital base, thereby complying with the prescribed limit for the Net Stable Funding Ratio.

Banks must also continue to comply with the current liquidity ratios (25% for foreign currencies and 20% for the local currency) according to the circular letter issued on September 20, 1990, and its amendments issued on March 20, 2005, as well as the circular letter issued on March 17, 2005, regarding the maturity ladder method, during the first phase of applying the new liquidity ratios.

-1 Liquidity Coverage Ratio (LCR)

The Liquidity Coverage Ratio aims to ensure that the bank holds sufficient High-Quality Liquid Assets (HQLA) unencumbered to cover net cash outflows over a 30-day period under an adverse stress scenario. This ratio is calculated according to the following formula:

Liquidity Coverage Ratio = High-Quality Liquid Assets / Net Cash Outflows over 30 Days

The Liquidity Coverage Ratio must not be less than 100% in all cases (at the end of the gradual implementation period). In other words, High-Quality Liquid Assets must be at least equal to the estimated net cash outflows. Therefore, the bank must maintain this ratio continuously, be aware of any gaps during the relevant period (30 days), and ensure the availability and sufficiency of High-Quality Liquid Assets to cover any potential cash flow gaps under adverse conditions during that period.

Components of the Liquidity Coverage Ratio: 1/1 High-Quality Liquid Assets (Numerator). 2/1 Net Cash Outflows (Denominator).

Table No. (1) illustrates the components of the Liquidity Coverage Ratio and the corresponding weighting factors for the items.

1/1 High-Quality Liquid Assets (Numerator)

High-Quality Liquid Assets represent all unencumbered assets sufficient to cover net cash outflows (over 30 days) under an adverse stress scenario. Generally, the High-Quality Liquid Assets included in the numerator of the Liquidity Coverage Ratio consist of two main levels (First and Second). The Second Level is also divided into two sub-levels (A and B) based on the quality and liquidity of the asset. The total value of items in the Second Level (Levels A and B combined) must not exceed 40% of the total High-Quality Liquid Assets (numerator of the ratio), while the total value of items in the Second Level (B) must not exceed 15% of the total High-Quality Liquid Assets (numerator of the ratio).

Assets must meet several characteristics to be considered High-Quality Liquid Assets, which can be divided into three main groups:

• Low Risk: Assets with low risk have high liquidity. High creditworthiness of the issuer increases asset liquidity, as does short redemption period, low legal risk, low inflation risk, and low exchange rate risk.
• Ease of Valuation and Credibility: Asset liquidity increases as market participants agree on its valuation. The pricing equation must be easy to measure and not based on complex assumptions. Inputs used in the pricing equation must be publicly available.
• Low Correlation with Risky Assets: Asset liquidity rises when it is not highly correlated with other risky assets. For example, assets issued by financial institutions may become illiquid during banking sector liquidity crises.
• Listed in a Developed and Recognized Securities Market: Asset liquidity increases when listed in developed and recognized financial markets.

b- Market-Related Characteristics:

• Active and Large Financial Markets: Historical experience shows that markets where assets are listed are large and allow active trading with a large and diverse number of participants. This reduces concentration and increases reliance on asset liquidity.
• Low Volatility Rates: Assets with relatively stable prices and less prone to sharp price drops are considered a reliable source to meet liquidity requirements. Market volatility is approximately measured by trading prices, and a historical record confirming stability and trading volume, especially during crises, must be available.
• Acquisition of the Asset Due to High Quality: Historical experience shows a tendency to acquire these types of assets during crises as they are of high quality (e.g., government instruments with high credit ratings).
• Assets must be owned by the bank and under the control of the Treasury management to be converted into cash to bridge the gap between incoming and outgoing cash flows during liquidity crises. These assets must be unencumbered and free from any restrictions on disposal.
• Liquid assets must not be used to cover the bank's trading positions or as collateral. These assets must be managed with the clear and sole purpose of being used as a reserve liquidity source.
• High-Quality Liquid Assets must be under the control of the management or departments responsible for liquidity risk management. The bank must periodically liquidate a portion of these assets in the market (via outright sales or repurchase agreements) to test their ability to be used as an additional liquidity source when necessary.

The components of the numerator of the Liquidity Coverage Ratio and their corresponding weighting factors are detailed below:

1/1/1 First Level (Weighting Factor 100%)

Includes the following:

1/1/1/1 Cash: Includes total cash balance, including cash in vault, cash in transit, auxiliary currencies, and checks.

2/1/1/1 Reserve balances at the Central Bank of Egypt: Includes balances at the Central Bank within the mandatory reserve ratio (including reserve surplus, if any) and foreign currency deposits within the 10% ratio at the Central Bank of Egypt.

3/1/1/1 One-night deposits at the Central Bank of Egypt.

4/1/1/1 Debt instruments traded in financial markets with zero risk weight: Includes non-government, foreign central banks, Bank for International Settlements, International Monetary Fund, European Central Bank, EU member state governments, and multilateral development banks. These instruments must meet the following conditions:

• Traded in large, active financial markets with low concentration.
• Not issued by a financial institution or any of its sister or affiliated units.
• Have a historical record confirming they are a reliable source of liquidity, especially under adverse market conditions.

5/1/1/1 Debt instruments (including Treasury bills) traded, issued by the Egyptian Government or the Central Bank of Egypt in the local currency: Includes Treasury bills (including those for Reverse Repo operations, excluding those for Repo operations), government bonds, and other debt instruments issued by these entities and traded in secondary markets.

6/1/1/1 Debt instruments (including Treasury bills) traded, issued by the Egyptian Government or the Central Bank of Egypt in foreign currencies: Includes Treasury bills (with the same treatment as in item 5/1/1/1 for Reverse and Repo operations), government bonds, certificates of deposit, and other debt instruments. The value of these instruments is taken up to the amount corresponding to net cash outflows resulting from the bank's activities in those foreign currencies under adverse conditions.

7/1/1/1 Debt instruments (including Treasury bills) traded, issued by the home country of the bank in that country's currency: Applies to branches of foreign banks and banks owned by foreign banks. Includes Treasury bills (with the same treatment as in item 5/1/1/1), government bonds, and other debt instruments issued by sovereign entities or the central bank of the home country, regardless of the risk weight of those instruments.

2/1/1 Second Level (Maximum 40% of the numerator - after applying weighting factors)

First: Second Level (A) (Weighting Factor 85%)

Includes the following:

1/2/1/1 Debt instruments traded in financial markets with a risk weight of 20%: Issued or guaranteed by foreign sovereign entities, foreign central banks, and multilateral development banks. Conditions:

• Traded in large, active financial markets with low concentration.
• Not issued by a financial institution or any of its sister or affiliated units.
• Have a historical record confirming they are a reliable source of liquidity, especially under adverse market conditions. This means the maximum price decrease of these instruments did not exceed 10%, or the maximum discount rate applied did not exceed 10% over a 30-day period during a parallel period of acute liquidity crisis.

2/2/1/1 Debt instruments issued by public bodies and companies, and Covered Bonds:

• For non-government debt instruments, they must not be issued by any financial institution or its sister/affiliated units.
• For covered bonds, they must not be issued by the bank itself or any of its sister units.
• Traded in large, active financial markets with low concentration.
• Have a long-term credit rating of AA or higher. If no long-term rating exists, they must have a short-term rating parallel to the above long-term rating, or no external rating but classified by the bank as having a failure probability parallel to at least an AA credit rating.
• Have a historical record confirming they are a reliable liquidity source, especially under adverse market conditions (max price drop or discount rate not exceeding 10% over 30 days during an acute liquidity crisis).

Second: Second Level (B) (Maximum 15% of the numerator - after applying weighting factors)

(Weighting factors ranging between 50% and 75%):

3/2/1/1 Residential Mortgage-Backed Securities (Weighting Factor 75%): Must meet the following conditions:

• Not issued by the bank itself or its sister/affiliated units.
• Traded in large, active markets with low concentration.
• Have a long-term credit rating from a recognized external credit rating agency of at least AA, or a short-term rating parallel to the aforementioned long-term rating if no long-term rating exists.
• Have a historical record confirming they are a reliable liquidity source (max price drop not exceeding 20%, or max discount rate not exceeding 20% over 30 days during an acute liquidity crisis).
• The property owner remains responsible for covering any shortfall between the sale value of the mortgaged property and the loan value in case of foreclosure. The value of residential loans (under which these securities were issued) must not exceed 80% of the property value on average at the time of issuance.
• Issuers of these securities must monitor the residential mortgage loans to protect investors' rights.

4/2/1/1 Debt instruments issued by public bodies and companies (excluding those in Second Level A) (Weighting Factor 50%): Must meet the following conditions:

• Not issued by a financial institution or its sister/affiliated units.
• Traded in large, active markets with low concentration.
• Have a long-term credit rating from a recognized external credit rating agency ranging between BBB and A+, or a short-term rating parallel to the aforementioned long-term rating, or no external rating but classified by the bank as having a failure probability parallel to a credit rating between BBB and A+.
• Have a historical record confirming they are a reliable liquidity source (max price drop not exceeding 20%, or max discount rate not exceeding 20% over 30 days during an acute liquidity crisis).

5/2/1/1 Ordinary Shares (Weighting Factor 50%): Must meet the following conditions:

• Not issued by a financial institution or its sister/affiliated units.
• Traded in large, active markets with low concentration.
• Listed in the main index of the Egyptian Exchange (EGX) or the main index of the home country in the case of branches of foreign banks and banks owned by foreign banks.
• Issued in Egyptian Pounds or the currency of the home country in the case of branches of foreign banks and banks owned by foreign banks.
• Have a historical record confirming they are a reliable liquidity source (max price drop not exceeding 40% over 30 days during an acute liquidity crisis).

Net Estimated Cash Outflows represent the total expected balance of cash outflows minus the total expected balance of cash inflows under an adverse stress scenario over the relevant period (30 days). The total expected balance of cash outflows consists of existing balances for different liability categories weighted by assumed withdrawal rates by creditors, and specific weighted rates for off-balance sheet items. The total expected balance of cash inflows consists of existing balances weighted by rates reflecting expected inflows under an adverse stress scenario. Total cash inflows must not exceed 75% of the total estimated cash outflows.

The components of the denominator of the Liquidity Coverage Ratio and their corresponding weighting factors are detailed below:

First: Cash Outflows

1/2/1 Deposits of Individuals and Micro, Small, and Very Small Enterprises: Includes deposits of "natural persons" and deposits of "Micro, Small, and Very Small Enterprises." These deposits are divided into:

1/1/2/1 Deposits with no maturity date (including demand deposits, savings deposits, documentary credit cover, and term/deposit/notice/frozen deposits with a remaining maturity of 30 days or less, or those with an implicit option reducing maturity to 30 days or less). These are divided into:

• Stable deposits (Weighting Factor 10%)
• Less stable deposits (Weighting Factor 15%) The stable and less stable portions are calculated based on the standard deviation of their average values over previous years using a model provided for this purpose.

2/1/2/1 Certificates of Deposit with a remaining maturity of 30 days or less (Weighting Factor 0%).

3/1/2/1 Various types of deposits / Certificates of Deposit with a remaining maturity of more than 30 days (Weighting Factor 0%).

2/2/1 Unsecured Financing (Deposits, Loans, Facilities, etc.) granted by other parties excluding individuals and Micro, Small, and Very Small Enterprises: Includes deposits with no maturity date or maturing within 30 days (or with an implicit option reducing maturity to 30 days or less), and installments of unsecured financing granted to the bank (e.g., loans) maturing within 30 days. This item is divided as follows:

1/2/2/1 Deposits for operational purposes (Weighting Factor 25%): Includes demand deposits for all parties (excluding individuals and Micro, Small, and Very Small Enterprises) and current accounts due to banks (including the Central Bank).

2/2/2/1 Deposits not for operational purposes and financing granted to the bank: Includes deposits with no maturity date (including savings deposits, documentary credit cover), term/notice/frozen deposits, and any other deposits maturing within 30 days (or with an implicit option reducing maturity to 30 days or less), as well as installments of unsecured financing granted to the bank (e.g., loans) due within 30 days. These items are from the following parties:

• Non-financial companies, Egyptian and foreign sovereign entities, public bodies, the Central Bank of Egypt, foreign central banks, and multilateral development banks (Weighting Factor 40%).
• Other parties other than those mentioned above, including banks (excluding central banks) and other financial institutions (e.g., insurance companies, investment fund management, financial leasing, securities, etc.) (Weighting Factor 100%).

3/2/1 Bonds not issued by the bank itself (unsecured), regardless of holder, maturing within 30 days (Weighting Factor 100%).

4/2/1 Unsecured financing (deposits, loan installments, facilities, unissued bonds, etc.) granted to the bank from the parties mentioned above in item 2/2/1, maturing after 30 days (Weighting Factor 0%).

5/2/1 Secured financing granted to the bank (e.g., loans, credit facilities, unissued bonds) due within 30 days (Weighting factors ranging from 0% to 100% depending on the collateral/cOUNTERparty):

1/5/2/1 Financing provided by the Central Bank of Egypt regardless of the type of collateral (e.g., Repo operations) or financing provided by any other counterparty secured by financial instruments with the same specifications and quality as First Level assets in the numerator (Weighting Factor 0%).

2/5/2/1 Financing provided by any counterparty secured by financial instruments with the same specifications as assets in Second Level (A) of the numerator (Weighting Factor 15%).

3/5/2/1 Financing provided by Egyptian sovereign entities or multilateral development banks secured by financial instruments not of the quality of those in First Level or Second Level (A) of the numerator (Weighting Factor 25%).

4/5/2/1 Financing provided by any counterparty (excluding Egyptian sovereign entities or multilateral development banks) secured by residential mortgage-backed securities with the same quality and specifications as those in Second Level (B) of the numerator (Weighting Factor 25%).

5/5/2/1 Financing provided by any counterparty (excluding Egyptian sovereign entities or multilateral development banks) secured by financial instruments with the same specifications and quality as assets in Second Level (B) of the numerator, excluding residential mortgage-backed securities (Weighting Factor 50%).

6/5/2/1 Other secured financing operations (Weighting Factor 100%).

6/2/1 Net Cash Outflows resulting from derivatives contracts (Weighting Factor 100%): Net cash outflows from derivatives contracts are obtained by netting outflows and inflows over 30 days resulting from derivatives contracts, provided the result is net outflows. Netting is only performed when contracts are with the same counterparty and according to a settlement agreement between the bank and the counterparty.

7/2/1 Contingent liabilities and commitments

1/7/2/1 The unused portion of irrevocable credit facilities and liquidity limits granted by the bank (regardless of maturity), including:

• Liquidity and credit limits granted to individuals and Micro, Small, and Very Small Enterprises (Weighting Factor 5%).
• Credit limits for non-financial companies, public bodies, sovereign entities, central banks, and multilateral development banks (Weighting Factor 10%).
• Liquidity limits for non-financial companies, public bodies, sovereign entities, central banks, and multilateral development banks (Weighting Factor 30%).
• Liquidity and credit limits for banks (Weighting Factor 40%).
• Credit limits granted to a financial institution other than banks (Weighting Factor 40%).
• Liquidity limits granted to a financial institution other than banks (Weighting Factor 100%).
• Liquidity and credit limits for other parties (Weighting Factor 100%).

2/7/2/1 The unused portion of revocable credit limits (Weighting Factor 5%).

3/7/2/1 Letters of Guarantee - Net after deducting cash cover (Weighting Factor 5%).

4/7/2/1 Import documentary credits and enhanced export credits - Net after deducting cash cover (Weighting Factor 5%).

5/7/2/1 Any other contingent liabilities and commitments (Weighting Factor 100%): Includes supplier facilities accepted papers, rediscounted commercial papers, other potential commitments, capital commitments, commitments for operating lease contracts, and litigation-related commitments.

8/2/1 Other cash outflows due within 30 days (Weighting Factor 100%): Includes cash outflows resulting from the following items (due within 30 days):

• Returns due on deposits held.
• Returns due on financing granted to the bank - whether secured or unsecured.
• Coupons due on bonds issued by the bank.
• Dividends due to the bank.
• Any other cash outflows due within 30 days.

Second: Cash Inflows

9/2/1 Inflows from regular loans and facilities granted to individuals and Micro, Small, and Very Small Enterprises (Weighting Factor 50%): Includes amounts contractually due within 30 days from the principal and returns of these regular loans and facilities.

10/2/1 Inflows from regular loans and facilities granted to the following parties:

• Non-financial companies (Weighting Factor 50%)
• Sovereign entities and multilateral development banks (Weighting Factor 50%)
• Public bodies (Weighting Factor 50%)
• Banks, other financial institutions, central banks (Weighting Factor 100%) These inflows include amounts contractually due within 30 days from the principal and returns of regular loans and facilities to the aforementioned parties.

11/2/1 Reverse Repo operations due within 30 days (Weighting Factor 0%).

12/2/1 The unused portion of irrevocable credit facilities and liquidity limits granted to the bank itself from any party other than the Central Bank of Egypt (Weighting Factor 0%).

13/2/1 The unused portion of irrevocable credit facilities and liquidity limits granted to the bank itself from the Central Bank of Egypt (Weighting Factor 100%).

14/2/1 Deposits with banks (excluding the Central Bank) and other financial institutions (maturing within 30 days or with no maturity date):

• For operational purposes (T...

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