Banking regulation Q&A: regulatory capital and liquidity of Luxembourg banks
The banking regulation Q&A series provides a comprehensive overview of the rules governing the banking sector in Luxembourg. Today's chapter focuses on the regulatory capital and liquidity.
How are banks typically funded in your jurisdiction?
Consistent with other Euro-area banks following the 2008 financial crisis, customer deposits represent the single largest source of funding. In 2016 deposits owed to customers represented 45.82% of total liabilities; this figure rose steadily to 48.84% in 2018. These deposits are sourced from non-financial and financial undertakings, private and/or retail customers, and the current accounts of investment funds. The second major area of funding for banks in Luxembourg is interbank liabilities, which represented 31.08% of total liabilities in 2018.
What minimum capital requirements apply to banks in your jurisdiction?
Credit institutions must have a share capital of at least €8.7 million which is subscribed, fully paid up and compliant with the relevant provisions of Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms, as amended (CRR) (Articles 28 and, where applicable, 29). They are also subject to specific rules on capital adequacy and must maintain a number of capital buffers.
Under the CRR, credit institutions must maintain, at all times, a total capital ratio (ie, the own funds of the credit institution expressed as a percentage of the total risk exposure amount, as calculated in accordance with the relevant provisions of the CRR) of 8%. The capital ratio must be composed of 4.5% of Common Equity Tier 1 capital, 1.5% of Additional Tier 1 capital and 2% of Tier 2 capital (each as defined under the CRR).
Under the Law of 5 April 1993 on the financial sector, as amended, credit institutions must maintain a capital conservation buffer composed of Common Equity Tier 1 capital equal to 2.5% of their total risk exposure amount calculated in accordance with the CRR, and an institution-specific countercyclical capital buffer composed of Common Equity Tier 1 capital which is equivalent to their total risk exposure amount calculated in accordance with the CRR multiplied by the weighted average of the countercyclical buffer rates. The CSSF is responsible for setting the countercyclical buffer rates applicable in Luxembourg. As per CSSF Regulation 19-08 of 1 October 2019, the countercyclical buffer rate for the fourth quarter of 2019, which is applicable as from 1 January 2020, is 0.25%.
Credit institutions may also, under certain conditions, be required to maintain a systemic risk buffer of Common Equity Tier 1 capital.
'Globally systemically important institutions' and 'other systemically important institutions' must maintain the additional capital buffers.
What legal reserve requirements apply to banks in your jurisdiction?
The European Central Bank requires credit institutions established in the euro area to hold deposits on accounts with their national central bank. These are called 'minimum' reserves. The reserve requirements are set out in Regulation (EC) No 1745/2003 of the European Central Bank of 12 September 2013 on the application of minimum reserves, as amended. In this respect, is should be noted that:
- branches in the euro area of credit institutions established outside the euro area are also subject to the minimum reserve requirements; and
- branches of euro area credit institutions which are located outside the euro area are not subject to the minimum reserve requirements.
Since 18 January 2012, the reserve ratio is:
- 1% for overnight deposits, deposits with agreed maturity or period of notice up to two years, debt securities issued with maturity up to two years and money market paper; and
- 0% for deposits with agreed maturity or period of notice over two years, repos and debt securities issued with maturity over two years.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
This article was first published in Mondaq.
Michael SchweigerLocal Partner Attorney at law / Avocat à la Cour / Solicitor
Michael Schweiger, local partner, is a member of the Banking & Finance practice group in our Luxembourg office. He leads the Luxembourg financial regulatory team and regularly advises banks, e-money and payment institutions, insurers, and other clients regarding financial regulation.T: +352 466 230 520 E: firstname.lastname@example.org
Adrien PierreSenior Associate Attorney at law / Avocat à la Cour
Adrien Pierre, senior associate, is a member of the Banking & Finance Practice Group in our Luxembourg office. He advises banks, asset managers, fintechs, payment institutions, insurance companies and other financial institutions on regulatory matters.T: +352 466 230 523 E: email@example.com