Central Bank of Libya Circular 18/2023: Supervisory Instructions for Calculating the Leverage Ratio

Central Bank of Libya
P.O. Box 1103 | Telegraphic Address: Central Bank of Libya - Tripoli, Libya

Reference Number: I.R.M 804
Circular No. (18/2023)
Date: 23 Dhu al-Qi'dah 1444
Corresponding to: June 12, 2023

To the Chairmen of Bank Boards of Directors, To the General Managers of Banks,

Subject: Supervisory Instructions for Calculating the Leverage Ratio

Greetings,
Based on the provisions of Law No. (1) of 2005 and its amendments, and in light of the supervisory and regulatory role exercised by the Central Bank of Libya over operating banks, and within the framework of the Central Bank's efforts to implement international Best Practices to enhance the financial soundness of the Libyan banking sector and hedge it against various types of banking risks, to elevate the level of the Libyan banking sector by applying the latest issuances of the Basel Committee's Core Principles for Effective Banking Supervision.

Accordingly, you are requested to implement the attached supervisory instructions, which shall operate alongside Circular No. I.R.M (2022/11) issued on 2022/10/06, and Circular (2022/13) issued on 2022/12/19, regarding minimum capital requirements, as well as the supervisory instructions issued by the Central Bank of Libya in implementing the latest Basel III decisions, and to comply with a leverage ratio not less than 3%, reflecting the adequacy of Tier 1 Capital (after deductions) used in calculating the capital adequacy standard to cover the bank's risk-weighted assets (on and off-balance sheet). You are also requested to disclose the calculated leverage ratio along with its numerator and denominator components in financial reports, and to comply with the attached calculation template when applying the minimum leverage ratio requirement.

Peace be upon you,
Naji Mohammed Isa
Director, Banking and Currency Supervision Department

Copies to:

• The Governor
• The Deputy Director, Banking and Currency Supervision Department (Office Supervision & Compliance Monitoring)
• The Deputy Director, Banking and Currency Supervision Department (Inspection Affairs)
• The Deputy Director, Banking and Currency Supervision Department (Islamic Banking Affairs)
• The Banking Supervision Offices in Benghazi
• Risk Management Department Managers at Banks (for follow-up)

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Banking and Currency Supervision Department

Supervisory Instructions for Calculating the Leverage Ratio

The leverage ratio is considered an additional requirement that operates alongside minimum capital requirements to enhance the financial soundness of banks, as it provides additional guarantees when a bank's risk assessment models fail to accurately estimate risks or in the event of errors in risk assessment. It reflects the relationship between Tier 1 Capital (after deductions) and the bank's total assets (on and off-balance sheet), where its ratio must range between 3% to 5%. The minimum leverage ratio requirement depends on the bank's systemic importance, as reflected by its size, market share, deposit volume, credit portfolio, and total assets, which in turn reflects its impact on the Libyan financial system.

Leverage Ratio Equation:

Leverage Ratio =
(Tier 1 Capital (after deductions)) / (On and off-balance sheet assets not risk-weighted) ≥ 3% - 5%

Numerator Components: The numerator consists of Tier 1 Capital (after deductions) used in the numerator of the currently applied capital adequacy equation, according to the aforementioned instructions of the Central Bank of Libya. It comprises the following core equity components:

a. Paid-up capital. b. Legal reserves.
c. Unallocated general reserves.
d. Other reserves (excluding revaluation differences). e. Capital under settlement. f. Share premium. g. Other provisions (not allocated to cover potential risks or expenses). h. Net profit of the previous financial year (unapproved, subject to external auditor approval) which has not yet been transferred to retained earnings, after excluding distributable profits to shareholders.

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Banking and Currency Supervision Department

Deductions: a. Net intangible assets. b. Net shares and contributions in banks and financial institutions.
c. The bank's repurchased shares.
d. Net book losses until the end of the period. e. Unrealized losses resulting from changes in the fair value of investments. f. Shortfalls in provisions for estimated non-performing loans not yet constituted by the bank. g. Shortfalls in provisions for other non-constituted assets. h. Amounts granted to major shareholders and board members, or used by them (whichever is greater).

Denominator Components:
The denominator consists of all the bank's on and off-balance sheet assets, referred to as the bank's exposures (i.e., the bank's risk exposures). It includes the sum of the following:
a. On-balance sheet items after deducting certain Tier 1 capital deductions:
All balance sheet assets are included in the denominator, except for derivatives listed on-balance sheet and securities financing transactions, which will be included under the exposures arising from derivative contracts and exposures arising from securities financing transactions, according to the following conditions:

1. Assets are included at net value after excluding impairment provisions (asset depreciation) for non-performing accounts, taking into account any valuations resulting from the application of recognized accounting standards.
2. Credit risk mitigation techniques and collateral are not allowed to reduce on-balance sheet asset exposures.
3. Netting between loans and secured deposits is not permitted.

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Banking and Currency Supervision Department

b. Off-balance sheet exposures:
Off-balance sheet items are included, which comprise irrevocable and revocable commitments, acceptances, letters of credit, guarantees, etc., in the leverage ratio denominator after applying the conversion factors provided in Table No. (1) below. Off-balance sheet items are included at net value after deducting impairment provisions for non-performing accounts and monetary sectors.

Appendix No. (1)
Table of Conversion Factors Used for Off-Balance Sheet Items

Item	Conversion Factor (CCF)
1- Contingent Liabilities:
a. Letters of Credit - Import	20%
b. Letters of Credit - Export	20%
c. Guarantees	50%
d. Guarantees requested by external banks	50%
e. Acceptances	100%
2- Commitments:
a. Capital commitments	100%
b. Litigation claims	100%
c. Commitments from operating lease contracts	100%
d. Commitments for loans and facilities to banks or customers (unused portion) with original maturity:
a. Irrevocable
1. More than one year.	50%
2. One year or less.	20%
b. Revocable without conditions at any time by the bank and without prior notice, or which include clauses for revocation due to deterioration of the borrower's creditworthiness.	10%

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