In order to promote consistent and harmonised reporting by institutions in accordance with Article 23 LCR DA, DNB provides the following guidance. This guidance is aimed at Dutch LSIs supervised by DNB and does not apply to SIs under SSM supervision. Institutions are requested to take into account this guidance in their LCR reporting. The guidance provided here remains subject to change.
In accordance with Article 23 of the Delegated Act on the Liquidity Coverage Requirement (Commission Delegated Regulation [EU] 2015/61), institutions need to assess the likelihood and potential volume of liquidity outflows during 30 calendar days for other products and services which are not covered in Articles 27-31 LCR DA and which they offer or sponsor or which potential purchasers would consider associated with them.
Since no specific outflow percentages are prescribed in Article 23 LCR DA, institutions can use their own methodology for assigning an appropriate outflow percentage to these products and services. As part of this assessment, institutions need to assume combined idiosyncratic and market-wide stress and they need to take into account material reputational damage that could result from not providing liquidity support to the products and services.
In addition to the regular (COREP) LCR reporting requirement, institutions need to report once a year to their competent authority on the products and services for which the likelihood and potential volume of the liquidity outflows is material. The competent authorities subsequently determine the outflow percentages for these material liquidity outflows.
To complement the regular LCR reporting framework, DNB has set up an annual qualitative data request aimed at the material liquidity outflows reported under Article 23 LCR DA. The goal is (1) to check whether the correct products and services are being reported under Article 23 LCR DA; and (2) to obtain information about the methodology used by institutions so as to decide whether the outflows applied to these products and services by the institution can be approved.
The guidance provided here serves to identify and clarify the products and services that are to be treated under Article 23 LCR DA. It provides common definitions of the non-exhaustive list of product categories specified in Article 23 LCR DA so as to promote consistent and harmonised LCR reporting. Section 2 contains a number of general interpretative principles. Section 3 contains a more detailed description of the products and services that can be reported under the various product categories of Article 23 LCR DA.
2. General Guidance
In principle, Article 23 LCR DA only covers items not treated elsewhere in the LCR DA. Hence before reporting a product or service under Article 23 LCR DA, institutions should consider whether the product or service is not already covered elsewhere in the LCR DA, especially in articles 27-31. To guide this assessment, the following clarification is offered:
- As a general rule, products and services reported under Article 23 LCR DA concern (1) uncommitted products; or (2) products or services that are committed but contain a contingent aspect.
- As a general rule, committed credit facilities are reported under Article 31 LCR DA.
- For the purposes of Article 31 LCR DA, ‘committed’ means non-cancellable or conditionally cancelable. The term ‘committed’ does not include offers that have not (yet) been accepted by the counterparty/client.
- For the purposes of Article 31 LCR DA, ‘credit facility’ is an agreement to extend funds if requested by the client in the future. This does not include (1) derivatives; (2) guarantees; (3) liquidity facilities in accordance with Article 31(1) LCR DA; or (4) a contractual commitment to extend funding under Article 32(3)(a) LCR DA.
- For the purposes of Article 32(3)(a) LCR DA, ‘contractual commitment to extend funding’ means a transaction that is contractually due within the next 30 days at which the extension would lead to an outflow of liquidity within the next 30 days and thus reduce inflows of monies due unless the outflow is captured elsewhere in the standard as a 100% outflow.
- For the purposes of Article 23 LCR DA, institutions are expected to use a sound methodology for deriving the appropriate outflow percentages to be applied to the products and service reported under this article. Since the LCR assumes a stress scenario, outflows of 0% are generally not permissible, unless an institution is able to substantiate the appropriateness of such a zero outflow under stress.
3. Specific Guidance
Article 23 LCR DA offers a non-exhaustive list of products and services that may fall within its scope. The guidance below provides a more detailed specification of these products and services.
a. Other off-balance sheet and contingent funding obligations, including, but not limited to uncommitted funding facilities
This category includes:
- Uncommitted credit facilities;
- Uncommitted funding facilities that may arise from underwriting activities;
- Letters of credit.
b. Undrawn loans and advances to wholesale counterparties
There is, in principle, no application of this category since these outflows would qualify as credit or liquidity facilities under Article 31 LCR DA.
Exceptions to this general rule are:
- ‘Flagship projects’, which can be described as exceptional cases which are high in volume and likely to occur within the next 30 days, but are not yet contractually fixed. It is important here to consider whether the treasury has already taken into account the outflows of such a project. Examples of such projects are the financing of an airport, nuclear power plant, opera house, etc.
- Construction related loans that are contractually not yet fixed, but which may be drawn down within the 30 day horizon.
c. Mortgage loans that have been agreed but not yet drawn down
With regard to mortgage loans, it is important that institutions distinguish the following cases:
- Mortgage loans that have been agreed, and which are either drawn down or agreed to be drawn down within 30 days. As a liquidity outflow is reasonably certain to take place within 30 days, these loans should be reported under Article 31(10) LCR DA.
- Mortgage loans that have been agreed (offered and signed), but which may not necessarily be drawn down within 30 days. As it is not certain that these agreed mortgages lead to a 100% liquidity outflow, these products may be reported under Article 23 LCR DA. Such mortgage loans are also known as pipeline mortgages and consist of the aggregate of formally agreed advances, including amounts recommended for retention, all instalment elements, and further advances. Institutions reporting mortgage loans under Article 23 LCR DA should be able to provide sufficient supportive argumentation to explain why they report their mortgages loans under Article 23 LCR DA and how they have determined the associated outflow percentage.
- Mortgage loans that have been offered but which have not been accepted yet by the prospective borrower (offered but not signed), should be reported under the category ‘other’ of Article 23 LCR DA (see below).
d. Credit cards
This category includes uncommitted credit cards which are settled at regular intervals (mostly monthly). It does not include services provided through debit cards.
Examples of such uncommitted credit cards are:
- credit cards that may be cancelled unconditionally at any time without notice, or that do effectively provide for automatic cancellation due to deterioration in a borrower’s creditworthiness.
- credit cards that are unadvised, i.e. unknown to the client but prepared for by the bank.
This category includes uncommitted overdraft facilities which may be allowed by a credit institution on an account, but the customer has not applied for its use. Committed overdrafts are credit facilities and are therefore captured under Article 31 LCR DA.
f. Planned outflows related to renewal or extension of new retail or wholesale loans
A product within this category can be uncommitted if there is no contractual commitment to the customer to extend funding, but nevertheless an expectation that the customer will ask for such a renewal.
g. Planned derivatives payables
Only in exceptional cases can products be reported in this category. The general treatment of derivatives related outflows is specified in Articles 21 and 30(4) LCR DA.
h. Trade finance off-balance sheet related products
Article 23(2) LCR DA states that competent authorities may apply an outflow rate of up to 5% for trade finance off-balance sheet products as referred to in article 429 and Annex I of Regulation (EU) No 575/2013.
The residual category includes among other items:
- Contingent outflows due to triggers other than downgrade triggers referred to in Article 30(2) LCR DA.
- Mortgage loans that have been offered by the bank, but which have not yet been accepted (signed) by the customer. Institutions reporting such mortgage loans under Article 23 LCR DA must provide sufficient supportive argumentation to explain the outflow percentage applied to these products.