Central Bank of Seychelles. Circular on Emergency Lending Facility

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Issued: July 09, 2009 Central Bank of Seychelles Circular on Emergency Lending Facility In line with section 29(b) of the Central Bank Act (2004), this circular sets out the Central Bank s guiding

1 Issued: July 09, 2009 Central Bank of Seychelles Circular on Emergency Lending Facility In line with section 29(b) of the Central Bank Act (2004), this circular sets out the Central Bank s guiding principles of the newly introduced lending facility to banks mainly for the purposes of safeguarding from insolvency events. This initiative is in line with the new policy direction of the Bank which is based on the active management of liquidity within the banking system. The facility, henceforth known as the Emergency Loan Facility is an emergency liquidity support facility primarily aimed at preventing severe and persistent short term liquidity problems that may lead to issues of insolvency and to avoid bank runs. The Central Bank reserves the rights to amend any of the provisions in the document including the interest charge, borrowing limits and haircuts pertaining to the instrument, on the basis of its monetary policy stance and/or to reflect market conditions. Banks will be notified of any change in advance. The facility became effective, retrospectively, as of June 30, In conjunction with the Standing Credit Facility, this circular supersedes and replaces all previous circulars on lending facilities, issued by the Central Bank.

2 Procedures on Emergency Loan Facility I. Introduction In line with the new policy direction taken by the Central Bank which is based on the active management of a bank s liquidity, a new instrument referred to as the Emergency Loan Facility (ELF) - an emergency liquidity support facility is being implemented to prevent severe and persistent liquidity problems at any bank faced with the issue of insolvency, and thus avoid bank runs. For this reason, the ELF aims to ensure that the banking sector remains operational through the means of credit made available by the Bank against acceptable assets as collaterals. To make certain that the facility is sought as a means of last resort, it will be provided at a penalty rate. In comparison to the Standing Credit Facility (SCF), which aims mainly at meeting payment obligations at end-of-day settlement, the ELF primarily addresses the issue of severe short term liquidity shocks which cannot be met from an alternative source. Moreover, this facility is also being implemented to further force banks towards achieving a more efficient and appealing interbank market thus enforcing the role of the Bank as being a regulator rather than a lender. II. Solvency Forecasting and Stress Tests In view of the monitoring mechanism set by the Financial Services Supervision Division (FSSD) of the Bank, banks will be expected to report all relevant information to the division for a thorough assessment to be carried out on the performance of any bank that intends to avail itself of this facility. The set of monitoring procedures, including stress testing, will allow the Bank to foresee any potential severe liquidity shock that could potentially lead to insolvency, and to act accordingly by issuing notices as well as recommendations to the bank. Banks will be expected to ensure that the information provided to FSSD is accurate and correct. In the event of the source of the solvency being based on matters that contravene the Financial Institution Act (2004), such actions that may amount to financial fraud will be reported to the responsible legislative authority

3 To this end, approval to access the ELF will greatly be influenced by the outcome of the assessment by FSSD as well as the Monetary Analysis and Statistics Division (MASD). Banks that borrow through the ELF will be subject to enhanced supervision, in line with the manual on Prompt Corrective Action. III. Necessary Preconditions and Eligibility of Emergency Loan Facility Any bank is eligible to access the facility at any time during Central Bank s business hours subject to the following: a) the bank has sufficient eligible collateral(s) in line with section IV; and b) the bank in question is ready to take any appropriate remedial action to deal with its liquidity problems. The loan will only be granted following approval by the Board of the Central Bank 1 after considering both financial and monetary stability issues. IV. Eligible Collateral For guarantee of credit, banks must have adequate and sufficient collateral(s) to back the credit granted. Banks will be required to surrender to the Central Bank the collateral(s) on the day the facility is used. Eligible assets that qualify as collaterals for the ELF are listed in Part C of this circular. The Bank reserves the right to accept or reject any of these assets as collaterals and to consider assets other than those listed therein. The market value 2 of the collateral(s) needs to be equal to or greater than the amount of credit being sought. In the case of Bills and Bonds, the market value will equal the Net Present Value 3, (see Part C section II) less a discount. The discount or haircut is applied to protect the Central Bank from market risks as well as to reflect the credit risk of the issuer of the security. As for the other collaterals, the nominal value less a haircut to reflect the associated risks will apply. 1 In line with the Central Bank of Seychelles Amendment Act The market value is defined as the Net Present Value of the collateral after discounting plus a haircut where applicable. 3 The Net Present Value is the face value of the security discounted at the current market rate

4 V. Term of the facility The Central Bank will provide emergency liquidity to banks against collateralised assets with a maximum loan duration of 30 days which should not exceed the maturity of the collateral(s) given. Subject to the approval of the CBS Board and based on the recommendations made by FSSD, such liquidity support may be extended for a further maximum of 30 days. VI. Interest Calculation Interest charge 4 (per annum) will be calculated on a straight line basis with the interest rate based on the current interbank average lending rate plus a margin of 200 basis points. (See formula 1). The interbank average lending rate will be published on CBS' website ( so that prior to applying for the facility, the banks are aware of the current interest charge. In the event that an interbank average lending rate cannot be established, the Bank will use the latest 91-day Treasury bill rate. Interest Charge = latest interbank average lending rate (%) % (1) The Bank may alter the margin of 200 basis points (2.0%), with the decision made, being based on the liquidity and monetary policy stance of the Bank as well as the soundness of the interbank lending market. VII. Procedures and Instructions VII.1 Application for the facility Once a bank has decided to access the facility and meets all the required preconditions stated in section III, a request letter addressed to the Governor or Deputy Governor for the attention of the Head of FSSD will be sent to the Central Bank. The letter must contain the following: - the rationale for borrowing; - the requested amount; - proposed loan duration; - the list of collaterals; and 4 Simple interest with day count convention of actual/

5 - the authorisation for the Central Bank to credit the respective account following approval. Submission may be made by facsimile or hand delivered, subject to the operation window being opened, together with the collateral. Only authorised signatories provided by the banks to Banking Services Division will be accepted as designated guarantors to the credit. In the event of a submission via , only requests with the commercial bank s extensions will be accepted and furthermore, requests must be confirmed via telephone. As mentioned in Part A, an SCF may be converted to an ELF, based on the outcome of the assessment. In such a case, a letter from that respective bank will not be necessary and the terms of the credit will be as per the provisions under the ELF. VII.2 Approval and Credit of Funds The FSSD will inform the bank by phone whether its application has been successful or not on the date the loan is approved 5. This will be followed by an official letter from either the Governor/Deputy Governor or a Head of Division assigned by the Governor. In the case of approval, the letter will state the approved amount to be extended, the interest cost and the repayment date based on the bank s request letter taking into consideration recommendations made by the FSSD and MASD. At the same time, the banks account will be credited with the sum of credit approved and the collateral(s) will be kept within the possession of the Central Bank. In the case when the application has not been successful, the Governor/Deputy Governor or a Head of Division assigned by the Governor will inform the bank in question by letter and the collateral(s) returned to the bank. VII.3 Repayment On maturity of the facility banks will repay the credit amount along with the interest payment based on the Central Bank s interest rate as specified in the approval letter. The total amount will be debited from the bank s account on the repayment date, after receiving written instructions from that bank. 5 Please note that in view of the longer procedures for approval of loans under the ELF, which needs Board s authori s ation, approval date will not necessarily match application date

6 VIII. Penalties If the facility is not repaid in full upon maturity and there was no recommendation made for a further extension to a maximum of 30 days by the FSSD, the Central Bank will acquire the collaterals provided, and may impose a penalty as decided by the Board and if necessary impose strict corrective measures. IX. Amendments The Bank may revise any of the above conditions if it does not meet the overall objective of its monetary policy stance. P. Laporte Governor - 6 -

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