According to Article 10(1)(b)(iii) of LCR Commission Delegated Regulation (EU) 2015/61, reserves held by the credit institution in a central bank can be counted towards the liquidity buffer provided that the credit institution is permitted to withdraw such reserves at any time during stress periods and the conditions for such withdrawal have been specified in an agreement between the relevant competent authority and the ECB or the central bank.

In this regard, the paragraph is referring to central banks in accordance with Article 10(1)(b)(i) [ECB or a Member State’s central bank] and Article 10(b)(ii) [central banks of third countries, provided that exposures to the central bank or its central government are assigned a credit assessment by a nominated external credit assessment institution (ECAI) which is at least credit quality step 1 in accordance with Article 114(2) of Regulation (EU) No 575/2013].

However, the question is now how to treat reserves in third countries where such an agreement does not exist or where further information is only provided in the legal framework which does not apply to branches. In the concrete case, an EU credit institution has a branch which is located in a third country (ECAI of the relevant country is “1” so Article 10(b)(ii) of LCR Commission Delegated Regulation (EU) 2015/61 may apply).

The branch holds some reserves at the central bank in the third country and the EU credit institution is now asking about the treatment of those reserves for the purpose of the LCR. Strictly speaking and following Article 10(1)(b)(iii) of LCR Commission Delegated Regulation (EU) 2015/61, credit institutions would now expect an agreement between the competent authority in the EU and the central bank in the third country. However, the relevant competent authority in the third country has only published some specifications on how to treat deposit balances at the relevant central bank in its legal framework, i.e. this framework does not apply to branches of EU institutions so the provisions in this text cannot be applied in the concrete case.

Strictly following the LCR Commission Delegated Regulation (EU) 2015/61, the conditions set in Article 10(1)(b)(iii) of LCR Commission Delegated Regulation (EU) 2015/61 are not met and the reserves held by the credit institution at the central bank in the third country are not eligible as Level 1 assets.

This would have far-reaching consequences as it would require the competent authority to set-up bilateral agreements with all central banks over the world to make sure that central bank reserves could generally qualify as liquid assets. In this case, the only possibility to consider those reserves would be under the cash inflows in accordance with Article 32(2) of LCR Commission Delegated Regulation (EU) 2015/61 which does not foresee further restriction to the definition of inflows. However, the same question would arise here regarding the treatment of required minimum reserves. On the eligibility of central bank reserves as high quality liquid assets, it should be noted that in the Basel III LCR framework, an agreement is required between the “local” supervisor and the central bank which could be interpreted differently compared to the LCR Commission Delegated Regulation (EU) 2015/61.