Responses to Banks' Inquiries and Comments on the NSFR Ratio Instructions Draft

Responses to Banks' Inquiries/Comments Regarding the Implementation of the Net Stable Funding Ratio (NSFR) Instructions Draft

General Comments on the Instructions Draft:

1. The draft does not address the treatment of cash collateral, which is a liability item mentioned in several places in the instructions. It is assigned a stable funding factor (ASF) based on stability factors that vary by counterparty and the underlying collateral. Answer: Cash collateral is considered a liability item, as stipulated in several places in the instructions. It is assigned a stable funding factor (ASF) according to stability factors that vary by the counterparty to which the collateral is linked (counterparty).

2. The draft does not clarify whether the HQLA item should be listed in the NSFR form based on its book value or fair value, and whether provisions and accrued interest should be deducted. It also does not specify if these items should be listed net of provisions. Answer: Generally, assets are valued at book value and at their fair value as shown in the bank's financial statements; and after deducting provisions and accrued interest, except for provisions for exposures classified in Stage 1, as they have been considered as regulatory capital instruments and included in the ratio denominator.

3. The following question is raised regarding the determination of the stable funding factor for assets: If a bank expects to extend the maturity of a certain asset before its due date, should the bank consider this behavior for NSFR calculation purposes and classify this asset in the appropriate required stable funding category? Answer: According to paragraph (21) of the instructions draft, the required stable funding factor for assets is determined based on their remaining maturity or ease of liquidation. When determining the maturity of a tool, it is assumed that customers may exercise any available options to extend the maturity of that tool. Therefore, when a bank expects to extend the maturity of a certain asset before its due date, the bank must consider such behavior for NSFR calculation purposes and classify this asset in the appropriate required stable funding category.

4. Is it mandatory to list the NSFR form items in the balance sheet before applying any regulatory deductions or adjustments? Answer: For the purpose of the Net Stable Funding Ratio standard, capital and liability items are listed at their book value before applying any regulatory deductions or adjustments, and asset items are listed at their book value representing the fair value as shown in the bank's financial statements; while they are shown net of provisions and accrued interest, (except for Stage 1 provisions which have been considered as regulatory capital instruments and included in the ratio denominator). Therefore, the differences between the total balances in the required forms before applying weights and in each of the required stable funding and available stable funding categories compared to the total balances in the balance sheet must be justified, and naturally, they are not material.

5. How should secured loans be treated if they are secured by collateral that is not eligible for HQLA but is subject to a regulatory haircut of 35%? Answer: They are treated as secured loans according to their maturity, and they are assigned a required stable funding factor consistent with their maturity.

6. The draft does not clarify the difference between conditional and unconditional cancellable credit facilities. Answer: Regarding the item of cancellable and conditionally cancellable credit facilities and liquidity facilities granted to any client, it should be clarified that the concept refers to the same as stated in the LCR instructions, which states that "committed credit and liquidity lines provided by the bank are committed agreements provided by the bank or those cancellable under conditions, and do not include any credit or liquidity lines cancellable without conditions which are included in future funding commitments." Also, the concept of existing liquidity facilities refers to "the unutilized (unused) amount available to the client to refinance debt in case the client is unable to repay this debt in the financial markets."

Technical Comments:

1. Question 2 raises the issue of whether the bank can exclude liquid assets from the HQLA calculation if there are legal, regulatory, or contractual restrictions preventing their recognition at the group level, and whether the bank can apply an 85% haircut to such assets. Answer: Paragraph number (2) of the instructions draft refers to a general rule that should be considered when calculating the Net Stable Funding Ratio. We note here that the bank must determine if there are any legal, regulatory, or contractual restrictions preventing the recognition of high-quality liquid assets at the group level, and calculate the assets that can be easily liquidated only as high-quality liquid assets. As paragraph (a/2/1) of the Liquidity Coverage Ratio instructions No. (2020/5) indicated, the bank must have a documented framework to ensure that its high-quality liquid assets are free from any restrictions at all times. Regarding the method of classifying high-quality liquid assets within the Net Stable Funding Ratio measure, the liquidable value (the value without restrictions) of high-quality liquid assets is included in the Required Stable Funding (RSF) category appropriate according to the requirements stipulated in the draft instructions, while the value with restrictions is assigned a required stable funding factor of 100%.

2. Question 33 asks about the difference between the two items? Answer: Paragraph (1/33) represents unsecured corporate loans with maturities of one year or more, which are subject to a risk weight of 35% or less under the regulatory capital instructions according to Basel III standards.

3. Question 13 asks about the treatment of Stage 1 provisions, which are assigned a 100% factor: "Stage 1 provisions are included in Tier 2 capital up to 1.25% of the credit risk-weighted assets." Should these be included in the 100% factor? Answer: Yes, since recognized Stage 1 provisions are considered a component of Tier 2 capital according to the regulatory capital instructions, and thus are assigned a stable funding factor of 100%. However, the amount of Stage 1 provisions exceeding the amount included in Tier 2 capital is included according to paragraph (l/13) of the instructions.

4. Question 13(f) regarding future commitments that are not yet drawn down: Should these be included in the 0% factor if they have a maturity of more than one year, or in the 100% factor if they are undrawn? Answer: This refers to any obligations incurred by the bank, including borrowed funds and deposits of Islamic investment banks, with a maturity of more than one year. In the case of payments due from these obligations with a period less than one year from the earliest obligations or accrued interest/returns (outgoing cash flow), this expected amount to be paid must be included in the appropriate Available Stable Funding (ASF) category according to the maturity. Example: If the bank borrows an amount of 10 million dinars from a certain party to be repaid in full after 5 years, and it is repaid in annual installments of approximately 500 thousand dinars, the expected amount to be paid/due in less than one year (amounting to approximately 1 million dinars) is considered an outgoing cash flow and must be included in the appropriate Available Stable Funding category according to the maturity and nature of the counterparty.

5. Question 17(d) and Question 35(d) mention in 17(d) that items with a factor of 0% are "items that are not subject to restrictions..." Question 35(d) asks about items with a factor of 100% that are not subject to restrictions, such as defaulted securities. Answer: Generally, Available Stable Funding (ASF) factors range from 0% to 100%, reflecting the degree of stability assumed for each type of funding. For example, if a type of funding is assigned an ASF factor of 0% (as is the case with the funding types mentioned in paragraph 17(a)), it is assumed that this funding will not be available for a period of one year (i.e., 100% of all funding will not be available over a one-year period). Regarding paragraph 35(d), generally, exposures assigned a Required Stable Funding (RSF) factor of 100% are illiquid and require full financing from stable funding sources. Conversely, the Required Stable Funding (RSF) factor of 0% applies to the most liquid assets of the bank, as it is assumed that they are cash or easily convertible to cash (i.e., they do not require stable funding to cover them).

6. Question 17(d) asks about items with a factor of 0% and whether there are exceptions for items with a maturity of more than one year, such as long-term deposits. Answer: Under the NSFR standard, liabilities with a maturity of less than one year are not considered a source of stable funding for the bank's off-balance sheet activities for a period of one year. Note that the main counterparties are classified according to their nature if they are individuals, companies, or financial institutions, and thus they are assigned the appropriate Available Stable Funding (ASF) factor accordingly.

7. Question 17(d) asks about items with a factor of 0% and whether there are exceptions for items with a maturity of more than one year, such as Tier 1 and Tier 2 capital. Answer: The draft instructions require the inclusion of regulatory capital items before deductions in the Available Stable Funding (100%) category, and among these items are minority interests, and thus they are assigned an ASF of 100%. Also, the draft instructions mentioned in paragraph 17(l) that liabilities assigned a stable funding factor of 0% / liabilities with no maturity date, except for minority interests which are usually permanent, are subject to a stable funding factor of 100% if their actual maturity is one year or more, and if their actual maturity is between six months and less than one year, they are assigned a stable funding factor of 50%.

8. Question 17(f) asks about items with a factor of 0% and whether there are exceptions for items with a factor of 100% that are not subject to restrictions. Answer: Derivatives and contracts with a maturity of one year or more cannot be excluded from both liabilities and assigned a stable funding factor of 100%, as the Net Stable Funding Ratio standard issued by Basel has not adopted such an option.

9. Question 22 asks about the treatment of Amortizing Loans, and whether the principal payments due after one year or with no maturity date should be included in the 65% factor if they are subject to a risk weight of 35% or less, and the remaining principal payments due within one year should be included in the 100% factor. Answer: The loan value and installments due after one year or with no maturity date are included in the Available Stable Funding (65%) category according to paragraph (2/33) of the instructions draft if they are subject to a credit risk weight of 35% or less according to the regulatory capital instructions issued by the Central Bank, or included in the Required Stable Funding (85%) category according to paragraph (l/34) of the instructions draft if they are subject to a risk weight of more than 35% according to the regulatory capital instructions issued by the Central Bank. Regarding the value of incoming cash flows related to the working capital facility amount with a repayment schedule within a period of one year or less, paragraph (22) of the instructions indicated that the portion due from these amortizing loans within one year is included in the less than one year maturity category.

10. Question 3/29 asks about the treatment of HQLA items in the NSFR form, specifically whether the full amount should be included in the 100% factor if it is not subject to restrictions, or if it should be included in the 0% factor if it is subject to restrictions, and whether this applies to the LCR ratio. Answer: For the purpose of calculating the Net Stable Funding Ratio, High-Quality Liquid Assets (HQLA) are defined as all HQLA without considering the operational requirements and caps for Level 2 assets stipulated in the Liquidity Coverage Ratio (LCR) instructions. Therefore, the entire total amount of these instruments is treated as Level 1 assets, and their full value is included [regardless of the amount allocated to net outgoing foreign currency cash flows as calculated for the Liquidity Coverage Ratio (LCR)], as stated in paragraphs (2/29) and (3/29) of the instructions.

11. Question 33 asks about the treatment of the 65% factor and whether it applies to unsecured corporate loans with a maturity of more than one year that are subject to a risk weight of 35%. Answer: The conditions stipulated under the item above must be met, where paragraph (1/33) represents unsecured corporate loans with maturities of one year or more and subject to a risk weight of 35% or less, and paragraph (2/33) represents all unsecured loans and deposits subject to a risk weight of 35% or less according to Basel (III) instructions No. (2016/67), which have remaining maturities of one year or more or have no maturity date, as stated in the draft instructions.