REGULATION ON THE MINIMUM REQUIREMENTS FOR ENSURING AN ADEQUATE LIQUIDITY POSITION OF BANKS AND SAVINGS BANKS

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1 (unofficial consolidated text) Published in the Official Gazette of the Republic of Slovenia, No. 28/07 dated 29 March 2007 (basic text) - in force from 30 March Official Gazette of the Republic of Slovenia, No. 55/07 dated 22 June 2007 (amendments and additions) - in force from 1 July Official Gazette of the Republic of Slovenia, No. 83/07 dated 14 September 2007 (amendments and additions) - in force from 22 September Pursuant to points 10 and 11 of Articles 129 and 194 of the Banking Act (Official Gazette of the Republic of Slovenia, No. 131/06) and the first paragraph of Article 31 of the Bank of Slovenia Act (Official Gazette of the Republic of Slovenia, No. 72/06 - official consolidated version), the Governing Board of the Bank of Slovenia issues the following REGULATION ON THE MINIMUM REQUIREMENTS FOR ENSURING AN ADEQUATE LIQUIDITY POSITION OF BANKS AND SAVINGS BANKS (Unofficial Consolidated Text) 1. GENERAL PROVISIONS Article 1 (content and purpose of the regulation) (1) This regulation defines the content, form and the manner of calculating and reporting of liquidity ratios for ensuring an adequate liquidity position. (2) The provisions of this regulation shall apply for banks, savings banks, branches of Member State banks and branches of third country banks (hereinafter: the banks). (3) Whenever this regulation makes reference to the provisions of other regulations, these provisions shall apply in their valid wording at the time in question. Article 2 (definition of terms) For the purposes of this regulation, the following definitions apply: (a) "liquidity position" shall mean the expected needs of a bank for liquid assets, expressed as the ratio between actual and potential liabilities and the actual and potential consumption of liquid assets in the same period; (b) "residual maturity" shall mean the period between the date for which a liquidity ratio was calculated and the maturity date of an individual financial asset or liabilities; (c) "liquidity risk" shall mean a risk of loss arising when a bank is unable to settle all mature obligations or when a bank, unable to ensure enough assets to settle obligations at maturity, is forced to secure the necessary assets with significantly higher costs than normal; 1

2 (d) "liquidity management scenario" shall mean the bank's liquidity position, assessed on the basis of internal and external assumptions, and measures adopted for the purpose of ensuring an adequate liquidity position, and shall include at least: "basic liquidity management scenario" shall mean a scenario whose assumptions reflect the expected trend and conditions of a bank's operations and for which the bank can anticipate with certainty that they will affect the bank's liquidity, taking into consideration the normal flow of business; "stress test scenario" shall mean a liquidity management scenario whose assumptions reflect different trends and operating conditions than in the basic scenario or include material changes of factors which act to worsen a bank's liquidity. 2. MINIMUM REQUIREMENTS WITH REGARD TO THE CALCULATION OF AN ADEQUATE LIQUIDITY POSITION Article 3 (liquidity ratio) (1) A bank shall periodically calculate its liquidity position. A bank shall calculate the liquidity position with a liquidity ratio. The liquidity ratio shall be the ratio between the sum of financial assets in local and foreign currencies and the sum of liabilities in local and foreign currencies with regard to residual maturity. (2) For the purpose of the first paragraph of this article, a bank shall classify financial assets and liabilities by residual maturity in the following two categories of maturity bands: (a) category one: financial assets and liabilities with a residual maturity of up to 30 days, and (b) category two: financial assets and liabilities with a residual maturity of up to 180 days. (3) A bank shall calculate the liquidity ratio daily for an individual category for the previous working day. (4) The category one liquidity ratio shall be at least 1. (5) The category two liquidity ratio is of an informative nature. (6) If a bank does not achieve the requirement set out in the fourth paragraph of this article, it shall state the reasons for failure to do so in its liquidity ratio report. Article 4 (criteria for consideration of financial assets) (1) A bank shall consider financial assets by the following criteria: (a) by residual maturity, (b) if they are financial assets to an obligor, rated and impaired: individually, only financial assets to obligors for which no problems are expected in the settlement of obligations and who settle their obligations at maturity or with a delay of up to 30 days, collectively, only financial assets to obligors which meet the conditions for classification into groups A and B pursuant to point 13 of the Regulation on the Assessment of Losses from Credit Risk of Banks and Savings Banks, (c) only the sum of financial assets that the bank has freely at its disposal, 2

3 (d) among the off-balance-sheet items, only forward transactions, contractually obtained credit lines and the un-drawn portion of loans are taken into consideration. (2) Notwithstanding the first paragraph of this article, a bank may not consider financial assets that it must hold for ensuring liquidity funds which are necessary for the payment of guaranteed deposits, in the calculation. Article 5 (criteria for including financial assets in both categories) (1) Irrespective of the residual maturity, a bank shall include the following financial assets in both categories: (a) investments that meet the criteria of eligible financial assets for the collateralisation of Eurosystem receivables as defined in the Bank of Slovenia regulation governing the general rules for implementing monetary policy; (b) investments in other foreign marketable debt and equity securities and in domestic marketable debt securities that are admitted to trading on a regulated market, as defined in Directive 2004/39/EC of the European Parliament and of the Council, and whose credit rating or whose issuer s long-term credit rating is at least BBB (Fitch or Standard & Poor s) or at least Baa2 (Moody s), if managed by the bank itself, but only in the amount and within the periods envisaged for access to liquidity by the management contract if entrusted to the management of another domestic or foreign bank or financial institution; (c) investments in other foreign serial debt securities for which the market price is available daily and whose credit rating and issuer's long-term credit rating is at least BBB (Fitch or Standard & Poor's) or at least Baa2 (Moody's). To the extent that the reference set of financial instruments is composed of securities, the credit assessment for each security shall be at least BBB (Fitch or Standard & Poor's) or at least Baa2 (Moody's). If a daily market price does not exist, the securities stated in this point shall have an American option which gives the holder the right to sell the security at any time until its maturity and where the option may be included in a serial debt security and enables the holder to sell the security to the issuer at a predetermined strike price or the option is concluded especially for this serial debt security at a predetermined strike price. The credit rating of the issuer of this option shall be at least BBB (Fitch or Standard & Poor's) or at least Baa2 (Moody's); (d) investments in Bank of Slovenia debt securities; (e) investments in deposits at the Bank of Slovenia. (2) Securities, which are not regularly traded with on a regulated market or for which it is not possible to verify the security's daily market price or for which the issuer has not provided an unconditional repurchase in a term of less than 30 days, shall not be considered among the investments set out in point (c) of the first paragraph of this article. (3) The financial assets set out in points (a) to (c) of the first paragraph of this article shall be valued at market prices for the purpose of inclusion in both categories. If a market price does not exist for a financial asset set out in point (a) of the first paragraph of this article, the bank shall value the asset by an amortised cost method. Article 6 (criteria for consideration of liabilities) (1) A bank shall consider liabilities by the following criteria: (a) by residual maturity, 3

4 (b) sight deposits of households and non-financial companies in category one are given a weighting of 50%; (c) sight deposits of households and non-financial companies in category two are given a weighting of 45%; (d) among off-balance-sheet items the following are taken into consideration: forward transactions, open uncovered letters of credit, contractually approved credit lines for banks and the un-drawn portion of approved loans which are not eligible financial assets for collateralization of liabilities of the Eurosystem, as defined in the resolution of the Bank of Slovenia, regulating general rules for monetary policy implementation, all taken into consideration in the amount of 100%; contractually approved credit lines for non-banks, excluding credit lines approved for covering open letters of credit, are taken into consideration in the amount of 20%; warranties issued, guarantees and stand-by letters of credit, and limits approved for current accounts and cards are taken into consideration according to the residual maturity in the amount of 5%. Liabilities pursuant to letters of credit are taken into consideration in an individual category in the amount of the uncovered portion according to the remaining period of validity, or according to the residual maturity after the documents are submitted. (2) A bank which has received the authorisation from the Bank of Slovenia for the use of an internal methodology for calculating the portion of stable sight deposits of households and/or non-financial companies (hereinafter: internal methodology) may, in place of the weights set out in points (b) and (c) of the first paragraph of this article, use the weights calculated by the internal methodology; however, the weights used shall never be less than 20%. (3) If a bank has not established or is not implementing a sound and reliable liquidity risk management system, the Bank of Slovenia may order the use of the higher weights as defined in points (b) and (c) of the first paragraph of this article. (4) With its order, with which a bank is issued the measure set out in the third paragraph of this article, the Bank of Slovenia shall define the steps the bank must take for the weights, set out in points (b) and (c) of the first paragraph of this article, to be valid for the bank. 3. THE USE OF AN INTERNAL METHODOLOGY FOR THE CALCULATION OF THE PORTION OF STABLE SIGHT DEPOSITS Article 7 (minimum requirements for the use of an internal methodology) (1) If a bank uses an internal methodology for the calculation of the portion of stable sight deposits of households and/or non-financial companies, it shall meet the following minimum requirements: (a) a reliable and accurate database of sight deposits of households and/or non-financial companies, segmented with regard to the characteristics of deposits, shall be available, (b) assumptions, which reflect the properties of individual products for the calculation of the portion of stable sight deposits, shall be taken into consideration, (c) the database of sight deposits of household and/or non-financial companies must properly be taken into consideration when defining the assumptions for performing basic and stress test scenarios, (d) the validity of assumptions shall be tested with different scenarios, and the results of testing appropriately implemented in current liquidity risk management policies, where the set of previously defined stress test scenarios are tested at least quarterly, 4

5 (e) the internal methodology shall be part of the bank's daily risk management process, where the results of the methodology shall be an integral part of identifying, measuring, controlling and monitoring liquidity risk, (f) the data observation period shall be at least five years, whereas the bank shall identify any major fluctuations of conditions which indicate a deviation from the trend of stability, assess their impact and such fluctuations appropriately statistically evaluate, (g) regular back-testing shall be carried out; i.e. subsequent comparison of the assessedportions of stable sight deposits with actual portions, where there shall not be material deviations between the assessed and actual situation. (2) A bank shall continuously meet the requirements set out in the first paragraph of this article, from the day the Bank of Slovenia issues authorisation for the use of an internal methodology. (3) At least half-yearly, a bank shall verify the appropriateness of the internal methodology. If the portions of stable sight deposits of households and/or non-financial companies, assessed with an internal methodology, materially deviate from the actual situation, the Bank of Slovenia shall be notified without any delay. The notification shall contain an exact description of the causes for deviation. Article 8 (authorisation for the use of an internal methodology) (1) The Bank of Slovenia shall issue authorisation for the use of an internal methodology if a bank meets the minimum requirements set out in Article 7 of this regulation. (2) A bank shall demonstrate that it meets the conditions specified in the first paragraph of this article by submitting the following documentation as part of its request for granting the authorisation: (a) a list of products, which the bank has included in the set of data for assessing the stability of deposits, and a description of their characteristics, (b) a document which includes descriptions and analysis of all assumptions the bank has used in the internal methodology, (c) a document with precisely described procedures for the operational implementation and use of the internal methodology, (d) a document describing the liquidity management scenarios the bank uses, with particular focus on stress test scenarios for which the bank has developed contingency plans, (e) a document describing contingency plans, used in the past, which were the basis for changes to business policies, and (f) a report on the review of the internal methodology, carried out by the internal audit department. (3) Six months prior to submission of the request set out in the second paragraph of this article, a bank shall notify the Bank of Slovenia of its intent. Article 9 (withdrawal of authorisation for the use of an internal methodology) The Bank of Slovenia shall withdraw the authorisation for the use of an internal methodology if the bank: (a) conducts itself contrary to the order or an order imposing additional measures for remedy of violations regarding the fulfilment of the conditions set out in Article 7 of this regulation, (b) is in serious breach of the conditions set out in Article 7 of this regulation. 5

6 4. PLANNING OF LIQUIDITY FLOWS - Deleted! Article 10 - Deleted! (liquidity flows) 5. REPORTING TO THE BANK OF SLOVENIA Article 11 (reporting) (1) A bank shall develop an adequate system and procedures for the calculation and monitoring of its liquidity position in order to meet liquidity ratios. (2) A bank shall ensure an accurate calculation and timely reporting to the Bank of Slovenia in accordance with this regulation and with regard to: (a)the liquidity ratios set out in the third paragraph of Article 3 of this regulation. (b) Deleted! (3) To fulfil the obligations set out in the second paragraph of this article, a bank shall submit reports to the Bank of Slovenia on form KL-1 which is an integral part of this regulation. (4) A bank shall submit a daily report by on liquidity ratios to the Bank of Slovenia by 12 pm the following day for the previous day. (5) - Deleted! (6) The Governor of the Bank of Slovenia shall issue instructions for implementing this regulation. 6. TRANSITIONAL AND FINAL PROVISIONS Article 12 (application of provisions and repeal of the regulation) (1) A bank shall include investments in Bank of Slovenia debt securities, set out in point (d) of the first paragraph of article 5 of this regulation in the calculation of liquidity ratios of both categories until their maturity or until 30 April 2007, at the latest. (2) A bank shall include investments in deposits at the Bank of Slovenia, set out in point (e) of the first paragraph of article 5 of this regulation in the calculation of liquidity ratios of both categories until their maturity or until 30 March 2007, at the latest. (3) Until 31 December 2007, a bank may include non-marketable financial assets, which do not meet the criteria of the minimum outstanding amount in accordance with the Bank of Slovenia regulation governing the general rules for implementing monetary policy, in the investments set out in point (a) of the first paragraph of article 5 of this regulation. (4) A banks may include all investments in debt securities of the Republic of Slovenia in the investments set out in point (a) of the first paragraph of article 5 of this regulation. 6

7 (5) Until 30 June 2007, a bank may report only liquidity flows in local currency on form TL. A bank shall notify the Bank of Slovenia on the transition to collective reporting in local and foreign currencies with the first report of this type. (6) On the day this regulation enters into force, the Regulation on the Minimum Requirements for Ensuring an Adequate Liquidity Position of Banks and Saving Banks (Official Gazette of the republic of Slovenia, Nos. 111/05 and 129/06) shall cease to be in force. 13. Article 13 (entry into force of the regulation) This regulation shall enter into force on the day after its publication in the Official Gazette of the Republic of Slovenia. Chairman of the Governing Board of the Bank of Slovenia dr. Marko Kranjec 7

8 BANK: Form KL-1 REPORT ON THE BANK'S LIQUIDITY RATIOS Report on the situation as at: Local currency thousands In local currency In foreign currency 0-30 days days more than 180 days 0-30 days days more than 180 days ASSETS A010 Cash-in-hand and cheques A020 Holdings on accounts at the Bank of Slovenia Claims to banks and savings banks on sight A031 A032 - to local banks - to foreign banks Other claims to banks and savings banks A041 A042 - to local banks - to foreign banks Claims from loans to the non-banking sector A051 A052 A053 A054 - households - non-residents - others - state A060 Bank of Slovenia bills A070 Securities of the Republic of Slovenia Other securities A081 - marketable foreign securities with a minimum credit assessment BBB A082 A083 - other foreign securities - domestic securities A090 Other asset items (e.g. interests) Off-balance-sheet items A101 - forward and spot transactions 8

9 A102 A103 - contractually obtained credit lines - un-drawn portion of loans A110 Financial asset funds LIABILITIES L010 Liabilities to the Bank of Slovenia Liabilities to banks and savings banks on sight L021 L022 - to local banks - to foreign banks Other liabilities to banks and savings banks L031 L032 - to local banks - to foreign banks Non-banking sector sight deposits L041 L042 L043 L044 L045 - enterprise sector - households - state - non-residents - other Time deposits to the non-financial sector L051 L052 L053 L054 L055 - enterprise sector - households - state - non-residents - other L060 Liabilities from issued securities L070 Other liability items (e.g. interests) Off-balance-sheet items L081 - forward and spot transactions 100% L082 - open uncovered letters of credit 100% L083 - contractually approved credit lines to banks 100% L084 - un-drawn portion of approved loans 100% L085 - contractually approved credit lines to non-banks 20% 9

10 L086 - warranties, guarantees, stand-by letters of credit, limits 5% LIQUIDITY RATIO (individual) LIQUIDITY RATIO (total) BANK: Form TL Reg. no.: REPORT ON LIQUIDITY FLOWS Report for the period from t to t +1 (two-day sliding report) EUR thousands Days t t+1 1. Beginning balance of liquid assets 1.1 Settlement account 1.2 Cash 2. Inflows 2.1 Loan repayments 2.2 Sale of securities Sale of securities (domestic issuers) Sale of securities (foreign issuers) 2.3 Sale of foreign currencies 2.4 Deposits: non-financial companies state households other 2.5 Monetary policy instruments 10

11 2.5.1 Main refinancing operations (MRO) Longer-term refinancing operations (LRO) Other 2.6 Other Inter-bank market Other A TOTAL INFLOWS 3. Outflows 3.1 Drawing of credit 3.2 Purchase of securities Purchase of securities (domestic issuers) Purchase of securities (foreign issuers) 3.3 Purchase of foreign currencies 3.4 Deposits: non-financial companies state households other 3.5 Monetary policy instruments Main refinancing operations (MRO) Longer-term refinancing operations (LRO) Other 3.6 Other Inter-bank market Other B TOTAL OUTFLOWS A-B (INFLOWS-OUTFLOWS) 4. ENDING BALANCE OF LIQUID ASSETS 4.1 Settlement account 4.2 Cash 11

12 Comments: Contact person: Stamp signature: and Telephone: 12