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“We are pleased the bonds issued by the ESM and EFSF have been recognised in this way by the Basel Committee on Banking Supervision", said Christophe Frankel, Deputy Managing Director and CFO of the ESM. "The BCBS ruling confirms to investors that our securities meet the highest standards for liquidity", he said.
The revised definition of the Liquidity Coverage Ratio (LCR) sets out the liquidity needs for the banking sector and the BCBS established additional specific conditions for issuers, such as a large, deep and active repo or cash market, and a proven record as a reliable source of liquidity in the markets even during stressed market conditions
The BCBS requires these and other additional conditions must be met to receive the designation Level 1 High Quality Liquid Assets.
This announcement follows a separate recommendation in December by the European Banking Authority (EBA) that ESM and EFSF notes should be considered transferable assets of extremely high liquidity and credit quality.
ESM/EFSF-newsletter March 2014
The Basel Committee on Banking Supervision has agreed that supervisors may allow banks to apply a 0 per cent risk weight to claims on the European Stability Mechanism (ESM) and European Financial Stability Facility (EFSF). The ESM and EFSF will be included in the list of entities receiving a 0 per cent risk weight set out in paragraph 56 of the document Basel II: International Convergence of Capital Measurement and Capital Standards: A Revised Framework - Comprehensive Version, June 2006, reading:
"56. Claims on the Bank for International Settlements, the International Monetary Fund, the European Central Bank and the European Community may receive a 0 per cent risk weight."
Claims on the ESM and EFSF will therefore also be included as Level 1 High Quality Liquid Assets (HQLA) in accordance with paragraph 50 (c) in Basel III: The Liquidity Coverage Ratio and Liquidity Risk Monitoring Tools, January 2013, reading:
"50. Level 1 assets are limited to:
(c) marketable securities representing claims on or guaranteed by sovereigns, central banks, PSEs, the Bank for International Settlements, the International Monetary Fund, the European Central Bank and European Community, or multilateral development banks, and satisfying all of the following conditions:
- assigned a 0 per cent risk-weight under the Basel II Standardised Approach for credit risk;
- traded in large, deep and active repo or cash markets characterised by a low level of concentration;
- have a proven record as a reliable source of liquidity in the markets (repo or sale) even during stressed market conditions; and
- not an obligation of a financial institution or any of its affiliated entities."
Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools