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On Monday, August 23, the General Guidelines on Liquidity Requirements for Banking Institutions issued jointly by the National Banking and Securities Commission (the “Commission”) and Mexico’s Central Bank, Banco de México, were published in the Official Federal Gazette (the “Guidelines”).

The Guidelines were issued in accordance with the guidelines established by the Committee on Banking Liquidity Regulation for the implementation of the Liquidity Coverage Ratio and the Net Stable Funding Ratio and intend to be consistent with the standards issued by the Basel Committee on Banking Supervision in terms of liquidity requirements, as long as the Mexican legal framework permits it.

 

I. Liquidity Coverage Ratio

The Liquidity Coverage Ratio is the result of dividing the Computable Liquid Assets of a Banking Institution (“Bank”) by the Total Net Cash Outflow of such entity:

  • Computable Liquid Assets are obtained from the classification of Eligible Liquid Assets into four categories, to which correspond different discount rates. An Appendix to the Provisions includes the determined Eligible Liquid Assets.
  • Total Net Cash Outflow is the amount that results from subtracting a Bank’s total cash inflow from its total cash outflow. Such flows shall be determined in accordance with the Guidelines.
  • Banks, depending on their month of operation, as well as on whether, as of the corresponding date, they have maintained an individual or consolidated loan portfolio equal to, greater than or lower than 30 billion UDIs of the minimum Liquidity Coverage Ratio level observed on any of the days of the calendar month of the corresponding period, as well as the accumulated deviations of the Liquidity Coverage Ratio in the month as defined in the Guidelines, shall be located in one of the liquidity scenarios from I to V indicated in the Guidelines, taking into account the lower of (i) the one calculated individually and (ii) the one calculated in consolidated terms.
  • The Liquidity Coverage Ratio corresponding to each day shall be reported within ten working days of that day.

Corrective measures

The Commission, with the opinion of Banco de México, considering the scenario in which each Bank is located or expects to be located and with the objective of reestablishing its liquidity, may, in general terms, order Banks to apply the following measures:

  1. Submit to its board of directors, as well as to the Commission and Banco de México, a detailed report on its liquidity situation.
  2. Limit or suspend, partially or totally, those operations that the Commission, with the prior opinion of Banco de México, considers necessary for the Bank to be located in scenario.
  3. Submit to the Commission and Banco de México a report on the use of the Contingency Funding Plan.
  4. Suspend the payment of dividends, as well as any mechanism or action that implies a transfer of equity benefits, as long as the Bank is not located in scenario.
  5. Submit to the Commission for its approval, with the prior favorable opinion of Banco de México, a liquidity restoration plan within a term of no more than five business days as of the day on which the Bank in question has been placed in the corresponding scenario.

 

II. Net Stable Funding Ratio

It is important to note that the Guidelines include the calculation of the Net Stable Funding Ratio for the first time in the Mexican regulatory framework applicable to Banks.

The Net Stable Funding Ratio is the proportion obtained by dividing the Amount of Stable Funding Available by the Amount of Stable Funding Required.

For the calculation of the Available Stable Funding Amount, Banks shall observe the following:

  1. All its liability operations and equity shall be included, including those contingent liability operations recorded in memorandum accounts.
  2. The amount to be considered for each transaction shall be the amount that corresponds with the Accounting Principles and the Guidelines, unless otherwise provided in the Guidelines, multiplied by the corresponding available stable funding factor allocated to it in terms of the Guidelines.
  3. The Bank’s own issuances, acquired and reported by a brokerage firm with which there have equity ties, shall be assigned the remaining term of the transaction in which the brokerage firm reported them.

Banks, in order to determine the Amount of Stable Funding Required for unrestricted assets and other operations, shall observe the following:

  1. Identify assets that are not pledged as collateral and which are available to them without any restriction, as well as those pledged as collateral in any transaction or which, for any reason, cannot be disposed of in liquidation, sale, transfer or assignment. Only assets that are not pledged as collateral or subject to any restriction should be taken into account.
  2.  The amount to be considered for each transaction will be the amount that corresponds to the Accounting Criteria and the Guidelines, multiplied by the corresponding required stable funding factor assigned to it in terms of the Guidelines.
  3.  The Amount of Stable Funding Required shall be the sum of the amounts calculated based on Annexes 7 and 8 of the Provisions.

Banks will be placed in one of the liquidity scenarios from I to IV indicated in the Guidelines, taking into account whichever is lower between (i) that calculated on an individual basis and (ii) that calculated on a consolidated basis.

The Net Stable Funding Ratio corresponding to the last Business Day of each month shall be reported during the first 16 Business Days of the immediately following month. 

Corrective measures

The Commission, with the opinion of Banco de México, which considers the scenario in which each Bank is located or expects to be located and with the objective of reestablishing its liquidity, may, in general terms, order Banks to apply the following measures:

  1. Submit to its board of directors, as well as to the Commission and Banco de México, a detailed report on its liquidity situation, as well as the causes that led to the decrease of its Net Stable Funding Ratio below 100 percent.
  2. Refrain from entering into transactions whose execution would cause their Net Stable Funding Ratio to deteriorate, as long as they are not located in scenario.
  3. Submit to the Commission, for its approval following a favorable opinion from Banco de México, a plan to restore the Net Stable Funding Ratio within a term not to exceed five Business Days from the day on which the Bank was placed in the mentioned scenario.
  4.  Suspend the payment of dividends, as well as any mechanism or action that implies a transfer of equity benefits, as long as the Bank is not located in scenario.

 

III. General Provisions

Information Reporting

Banks shall submit to Banco de México the results of the calculation of the Ratios, as well as the information necessary for their verification, in the form determined by Banco de México through the Financial System Information Directorate and by means of computer systems or by any other means, including electronic means indicated for this purpose by Banco de México, for which purpose it may prepare forms and operating aids.

Banco de México shall verify the calculations of the reported Ratios and shall communicate the corresponding result to the Commission. Notwithstanding the foregoing, the Commission may request the Central Bank, at any time, to verify the calculation of the Coefficients, based on the information that the Commission has determined in the exercise of its inspection and oversight powers.

Banks shall have all documentary evidence of the information considered for the calculation of the Ratios, when required by Banco de México or the Commission.

In the event that, as a result of the exercise of its inspection and surveillance functions, the Commission requires a Bank to make adjustments to the accounting records that result in modifications to any of the Ratios, or both, that such Bank has reported, the latter shall report the new calculation of such Ratios on the date indicated by the Commission for such purpose.

Restoration Plan

The restoration plan shall include, among others:

  1. In the event that the plan refers to the Liquidity Coverage Ratio, identify the sources of funds to increase its Computable Liquid Assets, or reduce the Total Net Cash Outflows.
  2. In the event that the plan refers to the Net Stable Funding Ratio, identify the sources of funds to increase the Amount of Stable Funding Available, or reduce the Amount of Stable Funding Required.
  3. Identify the reasons for which the Ratio in question was affected, as well as perform an analysis of the quantitative assessment of the effect of the actions necessary to restore its liquidity situation in both Ratios in the short and medium term, as well as in the regulatory limits established in the Law and the provisions derived therefrom, and identify the factors that could affect the implementation or effectiveness of the referred actions.

Breaches and Exceptions

It shall be understood that there is a breach of the liquidity requirements when Banks are located in scenarios III, IV or V in the case of the Liquidity Coverage Ratio and when Banks are located in scenarios III or IV in the case of the Net Stable Funding Ratio.

Likewise, Banco de México and the Commission may establish general exceptions to the Guidelines for a determined period of time, in whole or in part, under the terms of the resolution adopted by the Bank Liquidity Regulation Committee, as the case may be.

Entry into force

In accordance with the transitory articles of the Guidelines, the Guidelines will become effective on March 1, 2022, except for the provisions related to the Deposit Accounts for Operational Purposes, which will become effective on July 1, 2024.

As of March 1, 2022, and until July 1, 2024, for the purposes of the Guidelines, the outflow factors referred to in Annex 2 of the Guidelines will be applied for the determination of the outflow with respect to the money deposit accounts that comply with the characteristics of the Deposit Accounts with Operational Purposes, notwithstanding that the respective contracts do not state that the use of such accounts is only for the rendering of clearing, custody or cash management services. The foregoing, provided that the contracts referred to in the exception contained in this paragraph were executed prior to March 1, 2022.

 

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