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Banks’ funding in USD. Banks’ foreign currency loans - 31/07/2012


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Banks’ funding in USD

On 29 June 2012, the Commission de Surveillance du Secteur Financier (“CSSF”) and the Banque centrale du Luxembourg (“BCL”) published CSSF Circular 12/537 / BCL Circular 2012/229 on US dollar denominated funding of credit institutions. Article 5(1bis) of the Law of 5 April 1993 on financial services requires credit institutions to have effective processes to identify, manage, monitor and report the risks they are or might be exposed to. This Circular implements Recommendation ESRB/2011/2 and clarifies the application of the said Article as regards the risks involved in financing in US dollars (“USD”). These risks must also be reflected in the ICAAP report.

This Circular applies to all Luxembourg credit institutions based on their stand-alone and consolidated positions and comes into force with immediate effect. The proportionality principle is applied taking into account the nature, scale and complexity of the activities and organisation with respect to USD funding.

Credit institutions must identify, manage, monitor and report internally their currency and liquidity risks in USD and implement strategies and policies defining their risk tolerance relating thereto. Particular attention should be paid to the risks relating to:

  • maturity mismatches between resources and applications in USD.;
  • funding concentrations by counterparty type, with a focus on short-term counterparties;
  • use of currency swaps in USD;
  • intra-group exposures.


Credit institutions must also have contingency plans for emergency funding situations that:

  • provide for the management of shocks in USD funding;
  • are based on a feasibility study of actions referred to under a) in the event of simultaneous implementation of such actions by more than one credit institution;
  • examine the contingency funding sources available in the event of a reduction in supply from different counterparty classes.

Banks’ foreign currency loans

CSSF Circular 12/538 / BCL Circular 2012/230 on foreign currency loans was published on 29 June 2012. Articles 5(1bis) and 17(1bis) of the Law of 5 April 1993 on financial services require credit institutions, investment firms and professionals performing loan transactions to have effective processes to identify, manage, monitor and report the risks they are or might be exposed to. This Circular implements Recommendation ESRB/2011/1 on lending in foreign currencies and clarifies the application of the said Article for the banks, investment firms and professionals performing lending operations which grant foreign currency credit. Material risk s associated with foreign currency credit must also be reflected in the ICAAP report.

This Circular applies to all credit institutions, investment firms and professionals performing lending operations which grant foreign currency credit based on their individual and consolidated situations. This Circular comes into force with immediate effect. The proportionality principle is applied taking into account the nature, scale and complexity of the activities and organisation with respect to foreign currency credit.

In the context of this Circular, foreign currency lending is defined as loans to private non-financial borrowers (households and non-financial corporations) in currencies other than the legal tender in the state where the borrower is domiciled. This Circular takes into account the notion of coverage for the risk assessment. The borrower shall be deemed not covered when it does not have natural or financial hedging mitigating currency exposure associated with foreign currency loans.

Institutions should educate their borrowers concerning the risks involved in foreign currency loans. Adequate information regarding the risks must be provided in writing. The analysis of the creditworthiness of borrowers should take into account the repayment structure of the loan and the borrowers’ capacity to withstand adverse shocks in exchange rates and interest rates. Institutions are encouraged to apply more stringent conditions for granting foreign currency loans.

Institutions must implement strategies, policies and limits clarifying their tolerance to liquidity and currency risks. They must identify, manage, monitor and report internally currency and liquidity risks they take through foreign currency loans and in connection with overall liquidity positions. Particular attention should be paid to the risks related to:

  • concentrations of funding sources;
  • use of currency swaps;
  • maturity mismatches between assets and liabilities in foreign currencies;
  • currency mismatches between assets and liabilities.

Discover the other topics of this newsletter in the attached PDF.

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