Rwanda
Regulation of the National Bank of Rwanda relating to Liquidity Requirements for Banks
Regulation 17 of 2018
- Published in Official Gazette special on 16 January 2019
- Assented to on 27 December 2018
- Commenced on 16 January 2019
- [This is the version of this document from 16 January 2019.]
Chapter One
General provisions
Article One – Purpose
This regulation establishes prudential requirements to ensure sufficient liquidity for banks.It also aims at promoting short, medium to long-term funds to finance bank’s assets.Article 2 – Definitions
In this regulation, the following terms and expressions mean:1°“ALCO”: the Assets and Liability Management Committee;2°“Available stable funding (ASF)”: the portion of a bank’s capital and liabilities expected to be reliable over the time horizon considered by the Net Stable Funding Ratio (NSFR), which extends to one year;3°“Bank”: financial institutions regulated and supervised under banking law;4°“Cash”: notes and coins which are legal tender in Rwanda and any other currency freely negotiable and transferable in international exchange market;5°“Unencumbered assets” asset free of legal, regulatory, contractual or other restrictions on the ability of the bank to liquidate, sell, transfer, or assign the asset;6°“High-quality Liquid Assets (HQLA)”: assets that can be easily and immediately converted into cash at little or no loss of value;7°“Internal Liquidity Adequacy Assessment (ILAA)”: a combination of identification, measurement, management and monitoring of liquidity risk, implemented by a bank;8°“Liquidity”: ability of a bank to obtain sufficient cash or its equivalent at the right time to pay its liabilities as they become due;9°“Liquidity risk”: the risk of financial difficulties a bank may incur and becomes unable to meet payment obligations in a timely manner when they become due;10°“Required stable funding (RSF)”: a function of the liquidity characteristics and residual maturities of the various assets held by a bank as well as those of its off-balance sheet (OBS) exposures;11°“Total net cash outflows” the total expected cash outflows minus total expected cash inflows for the subsequent 30 calendar days;12°“Total expected cash outflows”: calculated by multiplying the outstanding balances of various categories or types of liabilities and off-balance sheet commitments by the rates at which they are expected to run off or be drawn down;13°“Total expected cash inflows”: is calculated by multiplying the outstanding balances of various categories of contractual receivables by the rates at which they are expected to flow in;14°“Wholesale funding”: all funding that is callable within the LCR’s horizon of 30 days or that has its earliest possible contractual maturity date situated within this horizon (such as maturing term deposits and unsecured debt securities) as well as funding with an undetermined maturity.Chapter II
Requirements of liquidity management
Article 3 – Responsibility of the Board of Directors
Without prejudice to other legal provisions, the Board of Directors of a bank must, all the time, be responsible for the management of liquidity risk and for establishing and maintaining adequate liquid assets and appropriate sources of funding.Article 4 – Obligation to maintain adequate liquidity
A bank must manage its assets and liabilities, as well as its off-balance sheets assets and liabilities to ensure it maintains the liquidity needed to meet its financial obligations as they fall due.A bank must establish a robust liquidity risk management framework that ensures it maintains sufficient liquidity, including a cushion of unencumbered, high-quality liquid assets, to withstand a range of stress events, including those involving the loss or impairment of both unsecured and secured funding sources.The Central Bank assesses the adequacy of both a bank's liquidity risk management framework and its liquidity position and must take prompt action if a bank is deficient in either area in order to protect depositors and to limit potential damage to the financial system.Article 5 – Obligation to set and manage the liquidity risk tolerance
A bank must set a liquidity risk tolerance in light of its business objectives, strategic direction and overall risk appetite.The liquidity risk tolerance set by a bank must:1°define the level of liquidity risk that the bank is willing to assume;2°be appropriate for the business strategy of the bank and its role in the financial system;3°reflect the bank’s financial condition and funding capacity;4°ensure that the bank manages its liquidity strongly in normal times in such a way that it is able to withstand a prolonged period of stress;5°be articulated in such a way that all levels of management clearly understand the trade-off between risks and profits.The Board of Directors, being ultimately responsible for the liquidity risk assumed by the bank and the manner in which this risk is managed, must establish the bank’s liquidity risk tolerance.Article 6 – Development of a strategy, policies and practices to manage liquidity risk
The bank must develop a strategy, policies and practices to manage liquidity risk in accordance with the liquidity risk tolerance and to ensure that the bank maintains sufficient liquidity.The Senior management must continuously review information on the bank’s liquidity developments and report thereon to the Board of Directors on a regular basis.The Board of Directors of a bank must review and approve the strategy, policies and practices related to the management of liquidity at least annually and ensure that senior management manages liquidity risk effectively.Article 7 – Sound liquidity management practices
To enhance the measurement and sound management of liquidity risk:1°A bank must have a sound process for identifying, measuring, monitoring and controlling liquidity risk. This process must include a robust framework for comprehensively projecting cash flows arising from assets, liabilities and off-balance sheets items over an appropriate set of time horizon;2°A bank must actively monitor and control liquidity risk exposures and funding needs within and across legal entities, business lines and currencies, taking into account legal, regulatory and operational limitations to the transferability of liquidity;3°A bank must establish a funding strategy that provides effective diversification in the sources and tenor of funding. In that view:a)the bank must maintain an ongoing presence in its chosen funding markets and strong relationships with funds providers to promote effective diversification of funding sources;b)the bank must, for any of its funding sources, regularly gauge its capacity to raise funds quickly from each source;c)the bank must identify main factors that affect its ability to raise funds and monitor those factors closely to ensure that estimates of fund-raising capacity remain valid.4°A bank must actively manage its intraday liquidity positions and risks to meet payment and settlement obligations on a timely basis under both normal and stressed conditions and thus contribute to the smooth functioning of payment and settlement systems;5°A bank must actively manage its collateral positions, differentiating between encumbered and unencumbered assets. In that view, the bank must monitor the legal entity and physical location where collateral is held and how it may be mobilised in a timely manner;6°A bank must have well-articulated information management systems.Article 8 – Obligation to conduct stress tests
A Bank must conduct stress tests on a regular basis for a variety of short-term and protracted bank-specific and market-wide stress scenarios (individually and in combination) to identify sources of potential liquidity strain for up to 30 days and to ensure that current exposures remain in accordance with a bank’s established liquidity risk tolerance.The Board of Directors receives reports regarding the information on the results of stress testing.The Board of Directors must demand that rigorous and challenging stress scenarios be considered, even in times when liquidity is plentiful.The bank must use stress test outcomes to adjust its policies and strategies on liquidity risk management, to improve its intraday liquidity positions and to develop effective contingency funding plans.Article 9 – Obligation to establish and maintain a contingency funding plan (CFP)
A Bank must have a formal contingency funding plan (CFP) that clearly sets out strategies for addressing liquidity shortfalls in emergency situations.A Contingency funding plan (CFP) must outline policies to manage a range of stress environments, establish clear lines of responsibility, include clear invocation and escalation procedures and be regularly tested and updated to ensure that it is operationally robust.When designing its contingency funding plan (CFP), a bank must take into account for the following elements:a)the impact of stressed market conditions on its ability to sell or securitize assets;b)the link between asset market and funding liquidity;c)second round and reputational effects related to execution of contingency funding measures;d)the potential to transfer liquidity across group entities, borders and lines of business, taking into account legal, regulatory, operational and time zone restrictions and constraints.The elements specified in a), b), c) and d) in the previous paragraph must reflect previous experiences of the bank or other institutions, expert judgment, market practice and insights that the bank has gained via the performance of stress tests.Article 10 – The role of the Asset and Liability Management Committee
In order to effectively monitor the bank’s liquidity risk management, the Board of Directors must ensure that the Asset and Liability management Committee (ALCO) plays the following roles:1°responsible for the management of the overall liquidity of the bank.2°report directly to the Board of Directors;3°facilitate, coordinate, communicate and control balance sheet planning with regards to risks inherent in managing liquidity and convergences in interest rates; and4°ensuring that a bank’s operations ly within the parameters set by its Board of Directors. However, The Asset and Liability Management Committee (ALCO) is not responsible for formulating the in-house liquidity risk management policy.A bank is required to maintain written report of the deliberations, decisions and roles of the ALCO with regards to liquidity risk management.Chapter III
Liquidity coverage ratio and net stable funding ratio
Article 11 – Objective of Liquidity Coverage Ratio
The Liquidity Coverage Ratio (LCR) is intended to promote a bank’s resilience to potential liquidity disruptions over a thirty (30) day horizon, by ensuring that a bank has sufficient unencumbered, high-quality assets to offset the net cash outflows it could encounter under an acute short-term stress scenario.Article 12 – Obligation to compute and maintain the LCR
A bank must compute and maintain its Liquidity Coverage Ratio on monthly basis.The ratio of a bank’s stock of high-quality liquid assets to its net cash outflows over the 30-day period must never be less than 100 percent.(Stock of high-quality liquid assets)/ (Net cash outflows over a 30-day time period) >100percentThe Central Bank may require an individual bank to calculate and maintain its Liquidity Coverage Ratio up to more than 100 percent:1°if it considers that the requirements for the calculation of the Liquidity Coverage Ratio need to be varied for that particular bank to reflect its business and related potential risks;2°for any other reason within the discretion of the Central Bank for the interest of the financial sector.Article 13 – LCR requirements for banks with significant foreign currency business
Bank with business denominated in foreign currencies must monitor their Liquidity Coverage Ratio for each significant currency. Furthermore, it must:1°identify, for the purposes of the provisions of this article, any of those significant currencies in which the denominated bank’s aggregate liabilities amount to 5% or more of the bank's total liabilities;2°make sure they maintain their LCR in conformity with the specific requirements provided in article 12 of this article and calculated as specified in the directive of the Central Bank.Where a bank does not have sufficient high-quality liquid assets to meet its net cash flows for a significant currency and the shortfall is not due to temporary causes, the bank must:1°plan how it would otherwise meet the net cash outflows in case of potential stress; and2°document its approach in its liquidity management strategy and policy.The Central Bank may, at any time, require the bank to submit its foreign currency liquidity policy at any time. The Central Bank may also require the bank to change its policy if this can contribute in meeting the objectives of this Regulation.Article 14 – Net Stable Funding Ratio (NSFR)
Unless provided overwise by the Central Bank, each bank must maintain, on a continuous basis, its Net Stable Funding Ratio of at least 100% calculated by dividing its Available Stable Funding (ASF) by its Required Stable Funding (RSF).(Available stable funding-ASF)/ (Required stable funding-RSF) >100 percentArticle 15 – Calculation of LCR and NSFR
The Central Bank must, by a directive, set out the requirements and the way for the calculation and treatment of the LCR and NSFR.Chapter IV
Internal liquidity adequacy assessment process (ILAAP)
Article 16 – Development of the Internal Liquidity Adequacy Assessment (ILAA)
A bank must develop its Internal Liquidity Adequacy Assessments (ILAA) that meets the directive of the Central Bank.The Bank must submit to the Central Bank, for review, its Internal Liquidity Adequacy Assessment (ILAA) within a maximum of 15 days after its approval. The Central Bank must notify to the bank of its findings based on the requirements of the directive.The Central Bank may refer to a bank’s Internal Liquidity Adequacy Assessment (ILAA) to require a bank to calculate and maintain a Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) exceeding the minimum ratio set out successively in Article 12 and 14 of this regulation, or to require a bank to meet the Liquidity Coverage Ratio requirements in respect of any significant currency following the provisions of as specified in article 13 of this regulation.Chapter V
Monitoring tools, reporting and public disclosure requirements in relation to liquidity
Section one – Liquidity risk monitoring tools
Article 17 – LCR and NSFR Standards
Banks are required to meet the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) requirements on an ongoing basis and they must have the required systems in place for such calculation and monitoring of specific information related to a bank’s cash flows, balance sheet structure and available collateral.Article 18 – Other monitoring metrics and remedial actions
In order to assess the liquidity risk of a bank, banks must, in addition to LCR standard, use as monitoring tools, metrics such as:1°contractual maturity mismatch;2°concentration of funding;3°available unencumbered assets;4°LCR by significant currency; and5°market-related monitoring tools, which are:a)market-wide information;b)information on the financial sector; andc)Bank-specific information.The metrics to be used as consistent monitoring tools as specified in the previous paragraph must capture specific information related to a bank’s cash flows, balance sheet structure, available unencumbered collateral and certain market indicators.In utilising these metrics, the Central Bank must take corrective measures when potential liquidity difficulties are signaled through a negative trend in the metrics, or when a deteriorating liquidity position is identified, or when the absolute result of the metric identifies a current or potential liquidity problem. Remedial actions that the Central Bank can take include but not limited to:1°requiring actions by the bank to strengthen its management of liquidity risk through improvements in internal policies, controls or reporting to senior management and the board;2°requiring actions by the bank to conduct robust stress testing and strobgly improve its contingency funding plans;3°Requiring a bank to take actions to lower its liquidity risk;4°restricting the bank from making acquisitions or significantly expanding its activities;5°requiring the bank to operate with higher levels of capital as a bank’s capital position can affect its ability to obtain liquidity, especially in a crisis.When the Central Bank requires remedial action by a bank, it must set a timetable for action and follow up to ensure the deficiencies are addressed in a timely and appropriate manner.The Central Bank must require more stringent or accelerated remedial action in the event that a bank does not adequately address the deficiencies identified, or in the case that the Central Bank deems further action is warranted by, for example, a deterioration in the bank’s liquidity position.Article 19 – Level of resilience to liquidity stress
The Central Bank must regularly perform a comprehensive assessment of a bank’s overall liquidity risk management framework and liquidity position to determine whether it deliver an adequate level of resilience to liquidity stress given the bank’s role in the financial system.Article 20 – Monitoring of reports and market information
The Central Bank must supplement its regular assessments of a bank’s liquidity risk management framework and liquidity position by monitoring a combination of internal reports, prudential reports and market information.Section 2 – Reporting and disclosure requirements
Article 21 – Reporting LCR and NSFR
A bank must report its LCR and NSFR in prescribed formats and timelines in accordance with the regulation on reporting requirements.Article 22 – Auditor’s review of the information reported by the bank
The external auditor of a bank shall provide assurance about the accuracy and quality of the information reported by the bank in accordance with this Regulation.Article 23 – Disclosure requirements
A bank must publicly, on a regular basis, disclose sufficient information regarding its liquidity risk management that enables market participants to make an informed judgement about the soundness of its liquidity risk management framework and liquidity position:1°A bank must disclose its organisational structure and framework for the management of liquidity risk. In particular, the disclosure must explain the roles and responsibilities of the relevant committees, as well as those of different functional and business units.2°As part of its periodic financial reporting, a bank must provide quantitative information about its liquidity position, including the following key metrics that management monitors:a)concentration limits on collateral pools and sources of funding (both products and counterparties);b)liquidity exposures and funding needs at the level of individual legal entities, foreign branches and subsidiaries, taking into account legal, regulatory and operational limitations on the transferability of liquidity; andc)Balance sheet and off -balance sheet items broken down into maturity buckets and the resultant liquidity gaps.3°Bank must disclose qualitative information including, but not limited to, the following key metrics that management monitors:a)governance of liquidity risk management, including: risk tolerance, structure and responsibilities for liquidity risk management, internal liquidity reporting; and communication of liquidity risk strategy; policies and practices;b)strategy for the diversification of the bank’s funding sources;c)liquidity risk mitigation techniques;d)an explanation of how stress testing is used;e)a description of the stress testing scenarios modelled;f)an outline of the bank’s contingency funding plans and an indication of how the plan relates to stress testing;g)the bank’s policy on maintaining liquidity reserves.4°Bank must disclose on an annual basis the asset liability management maturity pattern of certain items of assets and liabilities in their audited financial statements.A bank must either include the information required by this regulation in its published financial reports or, at a minimum, provide a direct and prominent link to the information completely disclosed on its website or in publicly available regulatory reports.Chapter VI
Sanctions and final provisions
Article 24 – Administrative sanctions
When the Central Bank determines that a bank is not in compliance with this Regulation, it may impose any or all of the administrative sanctions and fines prescribed in the regulation on administrative sanctions and fines applicable to banks.Article 25 – Repealing provision
The regulation N° 07/2017 of 19/05/ 2017 on liquidity requirements for banks and all other regulatory provisions contrary to this regulation are hereby repealed. However, Directives issued under this regulation remain valid.Article 26 – Drafting and consideration of this regulation
This regulation was prepared, considered and approved in English.Article 27 – Commencement
This Regulation comes into force on the date of its publication in the Official Gazette of the Republic of Rwanda.History of this document
16 January 2019 this version
Commenced
27 December 2018
Assented to