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26 January 2015 Supervision Supervision label Q&A

Question:

How does DNB check compliance with the minimum required liquidity buffer?

Answer:

A bank issuing registered covered bonds must submit proof to DNB each quarter showing that the aggregate value of the covered bond company's liquid assets is sufficient to meet obligations towards the bondholders in respect of interest payments and contractual repayments during a six-month period.

With regard to contractual repayments, the legal end dates of the covered bonds are considered. This means that issuing banks do not need to ensure that the covered bond company maintains liquid assets for repayments with respect to covered bonds issued with extension periods in excess of six months, i.e. soft-bullet covered bonds and conditional pass-through covered bonds.

The issuing bank must submit the following information to DNB, to allow it to check whether the covered bond company maintains the minimum required liquidity buffer:

A. Inflow
Interest payments and principal repayments from the underlying assets to which the covered bond company is contractually entitled for a six-month period. Early repayments are disregarded.

If the covered bond company has contracted derivatives to mitigate interest rate or credit risk, the amounts payable by the counterparty to the covered bond company must be included as inflow during the next six months.

Where inflow is based on a market rate, such as Euribor, the issuing bank must use the most recently established relevant market rate of the underlying mortgage loan or derivative as the market rate for the next six months to calculate inflow.

B. Outflow
Interest payments and principal repayments to the bond holders that the covered bond company must contractually make in the event of the issuing bank's insolvency for a six-month period.
If the covered bond company has contracted derivatives to mitigate interest rate or credit risk, the cash flows payable by the covered bond company to the counterparty must be included as outflow during the next six months.

The cost of liabilities ranking higher than the payments to bond holders must be included as outflow. This for instance includes fees payable to the covered bond company's servicer and trustee. To this end, the issuing bank must estimate the fees payable during the next six months, based on the contracts it has concluded with these parties.

Where outflow is based on a market rate, such as Euribor, the issuing bank must use the most recently established relevant market rate of the underlying registered covered bond or derivative as the market rate for the next six months to calculate outflows.

C. Liquid assets
The liquid assets must be held by the covered bond company and may also be held in deposit with the issuing bank or a third-party bank, provided that such a bank satisfies the minimum solvency requirement of Article 129(1) of the Capital Requirements Regulation (CRR).

When DNB checks the minimum liquidity buffer, the inflows over a six-month period plus the liquid assets must at least equal the outflows over a six-month period.

sector

  • Banks