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Basel Committee Agrees to 0% Risk Weight for European Stability Mechanism (ESM) and European Financial Stability Facility (EFSF)

The Basel Committee has agreed that supervisors may allow banks to apply a 0% 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% risk weight under the Basel capital framework — paragraph 56 of Basel II: International Convergence of Capital Measurement and Capital Standards: A Revised Framework (June 2006). Claims on the ESM and EFSF will also be included as Level 1 High Quality Liquid Assets (HQLA) under the Basel Committee’s liquidity coverage ratio (LCR) framework — paragraph 50 (c) of Basel III: The Liquidity Coverage Ratio and Liquidity Risk Monitoring Tools (Jan. 2013).

Existing paragraph 56 of Basel II: International Convergence of Capital Measurement and Capital Standards: A Revised Framework (June 2006) states:

56. Claims on the Bank for International Settlements, the International Monetary Fund, the European Central Bank and the European Community may receive a 0% risk weight.

Existing paragraph 50 (c) of Basel III: The Liquidity Coverage Ratio and Liquidity Risk Monitoring Tools (Jan. 2013) states:

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% 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.

 

Materials:

Basel Committee Newsletter No. 17, Risk Weight for the European Stability Mechanism (ESM) and European Financial Stability Facility (EFSF) (Mar. 2014) available here: http://www.bis.org/publ/bcbs_nl17.htm

Basel Committee, Basel II: International Convergence of Capital Measurement and Capital Standards: A Revised Framework (June 2006) available here: http://www.bis.org/publ/bcbs128.pdf

Basel Committee, Basel III: The Liquidity Coverage Ratio and Liquidity Risk Monitoring Tools (Jan. 2013) available here: http://www.bis.org/publ/bcbs238.pdf

 

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