EBA · 2022_6608 Rejected question

LCR treatment of letters of credit backed by deposits and letters of credit backed by committed lines

Regulation
Regulation (EU) No 575/2013 (CRR)
Article
460
Topic
Liquidity risk
Submitted by
Competent authority
Submitted
2022-10-11

Question

What is the LCR treatment of (i) letters of credit backed by deposits and (ii) letters of credit backed by committed lines?

Background

In the concrete case, a credit institution has issued two letters of credit: a letter of credit effectively covered by deposits where the amount of deposits available shall effectively cover the disbursement of the letters of credit; and a letter of credit effectively covered by committed lines where the disbursement of the letters of credit would be done by drawing down the facilities. The question is if the individual products (letter of credit, deposit and committed credit facility) would need to be considered as separate items in the LCR calculation or if they could be seen as combined products (letter of credit collateralized by a deposit, letter of credit collateralized by a committed facility) and, if yes, how to consider such combined products for the purpose of the LCR. At inception (which is the date of issue of the L/C) the bank blocks the limit with the gross amount of the L/C. At a later point in time (dependent on shipping period) the documents will be provided to the bank, they are verified and accepted. In rare cases the bank clarifies open issues or rejects the documents. Apart from the full rejection of documents the bank pays out the agreed L/C volume to the correspondent bank (bank of the exporter).
No answer published yet.

Original source: European Banking Authority, Q&A ID 2022_6608

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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