EBA · 2020_5550 Final Q&A

Treatment of cash on Nostro accounts – i.e., Bank’s cash held by a third party institution acting as a service provider for payment and settlement purposes

Regulation
Regulation (EU) No 575/2013 (CRR)
Article
134, para. 3
Topic
Credit risk
Submitted by
Credit institution
Submitted
2020-10-14
Answered
2022-11-11
Answer provided by
ESAs (EBA, ESMA, EIOPA)
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Question

Do exposures related to cash on Nostro / correspondent bank accounts (i.e., Bank’s cash held by a third party institution acting as a service provider for payment and settlement purposes) qualify for a 0% risk weight (equivalent to cash and cash balances at central banks) in both Standardized and IRB approach according to articles 134(3) and 156 (a), respectively?

Background

Our understanding is that exposures related to cash on Nostro accounts can be treated according to article 134(3) for Standard approach and 156(a) of CRR for IRB approach applicable to cash in hand and equivalent cash items. Cash held on Nostro accounts for correspondent banking purposes is: ■ Equivalent to cash in hand as those accounts are sight/demand deposits recorded within “cash and cash balances at central banks” according to Commission Implementing Regulation (EU) No 680/2014 Annex V. Part 2, paragraph 3 ■ Composed of very short-term exposures related to payment and settlement services and according to the paragraph (56) of CRR Recital “very short-term exposures related to money transmission including the execution of payment services, clearing, settlement and custody services” are exempt from a treatment similar to the one applied to other exposures to institutions Furthermore, this treatment would be consistent with article 390(6) of CRR which excludes Nostro accounts in the large exposure calculation. This treatment would also be aligned with the LCR calculation methodology, in which Nostro accounts receive a 100% inflow weighting as expressed in Q&A 2014_1576.

Answer

An exposure resulting from a deposit on a Nostro Account held at a third party institution constitutes an exposure to an institution within the meaning of Article 112(f) CRR under the Standardised Approach or Article 147(2)(b) CRR under the IRB Approach respectively.   Accordingly, the risk weight for a deposit on a Nostro Account has to be determined in accordance with the requirements applicable to exposures to institutions pursuant to Chapter 2 or Chapter 3 of Part Three, Title II of the CRR, as applicable.   With regard to Article 390(6) CRR and the relation with Nostro account, please see Q&A 4805 .

Original source: European Banking Authority, Q&A ID 2020_5550

This Q&A is published by European Banking Authority and is non-binding. It does not constitute legal advice. Updated weekly from official ESA sources.

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