## IMF Technical Assistance Report — Preface, Executive Summary, Introduction, and Selected Sections (tarea2026020-source-pdf)

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### Preface — Mission and Engagement
- MCM TA mission visited Victoria from August 10 to 21, 2025, at the request of the Central Bank of Seychelles (CBS).
- Purpose: assist authorities in development of Emergency Liquidity Assistance (ELA) and collateral frameworks.
- Meetings included:
  - Ms. Caroline Abel, Governor of the CBS;
  - Mr. Brian Commettant, First Deputy Governor;
  - Mr. Mike Tirant, Second Deputy Governor;
  - Management and staff from Financial Markets, Financial Surveillance, Research and Statistics, Banking Services, and the Legal Unit;
  - Mr. Patrick Payet, Secretary of State of the Ministry of Finance, National Planning, and Trade (MoF), and other MoF staff;
  - Managing Director and/or Treasurer of three commercial banks operating in Seychelles.
- Work responds to the 2023 IMF Safeguards Assessment recommendation to operationalize ELA following the amended CBS Act of 2024.

### Executive Summary — Objectives and Key Messages
- Objectives of proposed ELA framework:
  - Preserve financial stability.
  - Minimize moral hazard from ELA interventions.
  - Safeguard central bank core mandates: price stability, solvency, institutional independence.
- Assessment of banking system and current liquidity tools:
  - Banking system described as generally robust and well capitalized with comfortable liquidity buffers.
  - Most banks are part of international banking groups; parental liquidity support generally expected.
  - Current CBS liquidity instruments include:
    - Standing Credit Facility (SCF) — overnight monetary policy tool.
    - Emergency Lending Facility (ELF) — introduced in 2009 and divergent from effective ELA principles.
- Recommended design and publication of an ELA regulation upon Board approval to:
  - Manage stakeholder expectations and reinforce CBS accountability.
  - Articulate solvency, viability, and lender-of-last-resort provisions embedded in law.
  - Structure regulation around: financial stability objective and discretion; forward-looking solvency/viability assessments; full collateralization; penalty interest rate pricing (recommended spread e.g., 200–300 basis points above the SCF).
- Internal preparedness:
  - Support regulation with internal guidelines, ELA Working Group (EWG), simulation exercises, and clear decision-making workflows.
- Coordination with MoF:
  - Establish a Memorandum of Understanding (MoU) to define information exchange, circumstances for government guarantees, and modalities of guarantees.
- Collateral framework:
  - Monetary policy operations: eligibility can remain limited to CBS deposits and government securities.
  - ELA: readiness to accept nonstandard collateral (credit claims, FX-denominated marketable and nonmarketable assets); ensure legal ability, mobilization, valuation, and risk controls.
- Haircuts and risk calibration:
  - Calibrate haircuts using models accounting for liquidity, market, and credit risks and the CBS’s risk appetite.
  - Hands-on sessions covered haircut models and calibration components.

### Selected Recommendations (highlights and exact numeric parameters)
- ELA Regulation (Priority: High unless noted)
  - Articulate and publish a regulation for an effective ELA framework. (Priority: High; Timeframe: Medium term)
  - Define forward-looking solvency and viability requirements to be fulfilled in all cases (¶31). (High; Medium term)
  - Specify the lender-of-last-resort criterion for provision of ELA (¶36). (High; Near term)
  - Allow for strict conditionality (¶39, ¶40). (High; Near term)
  - Specify that ELA will be priced at a positive premium of 200–300 basis points over the SCF (¶42). (High; Medium term)
  - Determine the ELA envelope by estimated liquidity needs and cover a period of two weeks, with daily disbursements allowed within the overall agreed envelope (¶43). (High; Medium term)
  - Restrict duration of ELA to within six months set by law (¶44). (High; Medium term)
  - Disclose financial soundness requirements for monetary policy counterparties (¶21). (Medium; Medium term)
  - Ensure legal, operational, and technical readiness for provision of ELA in foreign exchange (FX) with additional risk mitigation and stricter conditionality (¶45). (High; Near term)

- Internal Guidelines, Preparedness, and Communication Policy
  - Set up an internal interdivisional working group to draft ELA regulation and internal procedures, run regular simulations, and handle ELA requests (¶58). (High; Near term)
  - Internal procedures should specify responsibilities of divisions and internal decision-making (¶58, ¶60). (High; Near term)
  - Run regular simulation exercises (¶61). (Medium; Medium term)
  - ELA working group should specify ex-ante, ongoing (reactive and proactive), and ex-post transparency and communication policy concerning ELA (¶52, ¶53). (High; Near term)
  - Develop a regular monitoring framework to anticipate potential liquidity risks (¶32). (Medium; Medium term)

- Memorandum of Understanding (MoU) with MoF
  - Establish a MoU defining scope of information exchange, institutional roles, and the form, amount, process, and conditions of government guarantees per the CBS Act (¶55, ¶56). (High; Near term)

- Collateral Policy
  - Develop legal and operational capacity to accept nonmarketable assets, including credit claims, as collateral for ELA (¶76). (High; Medium term)
  - Implement valuation methodologies and risk mitigation measures for each collateral class as proposed (Sections III.D and III.E). (High; Medium term)
  - Conduct regular collateral scanning to determine preference order for assets mobilizable for ELA (¶73). (Medium; Medium term)
  - Encourage collateral prepositioning for due diligence (¶65). (Medium; Medium term)
  - Dedicate resources to valuation of nonmarketable or illiquid marketable assets (¶77). (Medium; Medium term)
  - Strengthen risk-mitigation measures to capture key market risks (¶89, ¶91). (Medium; Medium term)

Timeframe key: Near term: < 12 months; medium term: 12 to 24 months.

### I. Financial and Monetary Landscape — Key Statistics (June 2025 balance sheet basis)
- Total financial sector assets: approximately 150 percent of GDP.
- Commercial banks: 81 percent of total financial sector assets.
- Pension funds: 10 percent.
- General and life insurance companies: 3.7 percent.
- Credit union: 1.5 percent.
- Other nonbank financial institutions: 3.8 percent.
- Sector composition and concentration:
  - Seven banking entities: three subsidiaries of foreign banks, two branches of foreign banks, two locally incorporated banks with government controlling stakes.
  - The three largest banks account for 87 percent of total banking system assets as of May 2025.
  - Herfindahl-Hirschman Index (HHI): 2687.
- Funding and vulnerability indicators:
  - Customer deposits average 85 percent of total liabilities.
  - Equity represents 10.5 percent of total liabilities.
  - FX deposits constitute nearly 50 percent of total deposits.
  - Nonfinancial corporate deposits: average 43 percent of total deposits; up to 64 percent in one bank.
  - Deposits from other financial institutions: 16 percent of total deposits overall; concentrated at 36 percent and 28 percent in two banks respectively.
  - Sight and savings deposits: approximately 75 percent of total deposits and over half of total bank liabilities.
  - Deposit dollarization: nearly 50 percent.
- Liquidity regime and CBS operations:
  - Average excess reserves range between SCR 100 million and SCR 150 million per maintenance period.
  - CBS estimate of structural precautionary balance: SCR 50 million.
  - MRR ratio: 13 percent on both rupee and foreign currency deposits of residents.
  - SCF/SDF corridor: 150 basis points above and below the MPR.
  - SCF availability: daily between 3:00 p.m. and 4:00 p.m.
  - SCF eligible collateral: fixed-term deposits at the CBS, SCR-denominated Treasury bills, and government securities.
  - SCF usage: since the beginning of 2024, accessed only five times.
  - Stock of SCR-denominated government securities in the banking system: about SCR 4.5 billion as of May 2025.
  - Since beginning of 2024, domestic debt in rupees has dropped by around SCR 1.5 billion (CBS data).

### II. ELA Legal Basis, Eligibility, and Operational Parameters
- Legal basis:
  - Amended CBS Act of 2024:
    - Defines eligibility: solvent and viable, but temporarily illiquid, deposit-taking institutions—banks and credit unions—on a last-resort basis and against adequate collateral.
    - Authorizes CBS to determine eligible collateral assets on a case-by-case basis.
    - Provides explicitly for government guarantees where solvency, collateral sufficiency, or resolution funding concerns arise and financial stability is at risk.
    - Aligns ELA maturity with best practice: daily disbursements within fortnightly envelopes; maximum overall maturity of six months.
- Eligibility requirements (internal guidelines should require):
  - (i) legal eligibility;
  - (ii) solvency on a forward-looking basis and viability;
  - (iii) exhaustion of all other available funding sources.
- Forward-looking solvency and viability:
  - Solvency assessment allows ELA to be extended to a temporary undercapitalized bank if there is credible prospect to restore capital adequacy within a reasonable period (e.g., six months or lower given legal constraint).
  - Viability assessment is business-model focused: business strategy, asset quality, governance, earnings, liquidity, risk management.
  - FSS must be capable of evaluating forward-looking solvency and viability within 24 hours as input to final decision.
- ELA financial parameters and governance:
  - Pricing: apply a positive premium over the highest monetary policy facility rate; mission recommends premium over the SCF with typical range 200–300 basis points.
  - Envelope and disbursements: envelope based on forecasted liquidity needs over a two-week period; daily disbursements within envelope; bank submits detailed cash flow forecast for upcoming two weeks.
  - Maximum duration: within the six-month limit set by law; disbursements based on two-week approved envelope from CBS Board of Directors.
  - ELA in FX: require legal, operational, and technical readiness; apply higher haircuts, stricter conditionality, more intrusive supervision, and possibly a higher premium than SCR ELA.
  - Currency-specific liquidity ratios: consider differentiating liquidity ratio by currency (e.g., at least 20 percent of liquid assets in the same currency as liabilities for significant currencies > 5 percent of total liabilities).
- Exhaustion of alternative funding:
  - Internal guidelines should verify exhaustion of secured and unsecured money markets, parent institution liquidity lines, and CBS SCF; mandatory submission of supporting information required.
- Foreign-owned entities:
  - Subsidiaries must fully exhaust parent funding, including committed lines, and home central bank funding before ELA consideration; MoUs with home supervisors and participation in colleges of supervisors may be needed.

### III. Conditionality, Funding Plans, and Repayment Mechanics
- Conditionality:
  - Initial funding plan required with ELA request; CBS finalizes plan with counterparty within days of first disbursement.
  - Possible restrictions: prohibit equity buybacks; restrict use of funds for nonessential/risky lending, dividends, bonuses; measures to prevent upstreaming to parents for foreign subsidiaries.
  - Conditionality may include governance and risk management measures identified in viability assessments.
- Funding plan and monitoring:
  - Bank must submit a detailed funding plan for the two-week envelope and update as required; daily monitoring of cash flows and deposit flows.
- Repayment, discontinuation, and collateral enforcement:
  - Counterparty repays principal and accrued interests upon maturity or prepayment.
  - CBS may discontinue ELA and require immediate repayment if conditions no longer met.
  - If counterparty fails to repay, CBS shall enforce collateral to recover outstanding exposure, exercising care to preserve reasonable value.
  - Pledge relief of collateral only after full repayment of ELA, accrued interests, and penalties.

### IV. Transparency, Communication, and MoU with Government
- Transparency trade-off:
  - Ex-ante transparency: public regulation should disclose broad ELA terms (financial stability objective, discretionary nature, forward-looking solvency/viability requirement, full collateralization, penalty interest rate) while keeping sensitive elements (collateral preference order, valuation, risk control) confidential.
  - Real-time transparency: not generally recommended; communication strategy should be ready to address market rumors and public inquiries.
  - Ex-post disclosure: CBS should develop ex-post communication guidelines to ensure accountability while avoiding disclosures that could exacerbate liquidity stress; identifying ELA recipient may be required at least one year after repayment.
- Agreement with Government (MoU):
  - MoU should define scope of information exchange, roles, circumstances for government guarantees, and modalities of guarantees.
  - Guarantees may be required when:
    - (i) risk of undercollateralization;
    - (ii) solvency is uncertain;
    - (iii) ELA is used for funding-in-resolution and exit strategy concerns arise.
  - Guarantees must be legally enforceable, irrevocable, unconditional, and rank pari passu with other senior government obligations.
  - Considerations for government transparency: proposal for debt management legislation to notify Parliament of guarantees within 90 days; mission suggests mitigations (e.g., extend reporting deadline to six months or limit detail until after repayment) to avoid precipitating instability.

### V. Operationalization, Governance, and Preparedness
- ELA Working Group (EWG):
  - Establish EWG to draft regulation, develop internal procedures, run simulations, handle ELA requests; chair could be FMD.
  - Membership: Financial Surveillance, Research and Statistics, Legal, Communications, Risk Management Unit.
- Process and timing:
  - Aim to complete evaluation of ELA requests within 24 to 48 hours.
  - Assessment elements: eligibility evaluation; conditionality formulation; financial parameter calibration.
  - Preparatory steps: draft funding plans, ELA requests, ELA master agreements in advance and make templates available.
- Decision-making:
  - Board retains decision-making responsibility; decisions should be collegial and prompt.
- Division responsibilities for ELA request evaluation (listed exactly as in source):
  - Solvency assessment — Financial Surveillance
  - Viability assessment — Financial Surveillance
  - Systemic risk assessment — Financial Surveillance
  - Unavailability of alternative sources of funding — FMD and Financial Surveillance
  - Funding to banks in resolution: to provide input on solvency assessment and exit strategy — Resolution Unit
  - Preparation and implementation of funding plans, including conditionality and escalation triggers — FMD and Financial Surveillance
  - Prescription of conditionality in the ELA agreement — Financial Surveillance and Legal Unit
  - Calibration of ELA envelope — FMD
  - Preparation of ELA master agreement, collateral agreements, and indemnities — Legal Unit
  - Implications of ELA for monetary policy — FMD, Financial Surveillance, and Research and Statistics
  - Information exchange with the MoF in relation to indemnities — EWG Chair—Head of FMD
  - Communications strategy — EWG and Communications Unit
  - CBS disclosure — EWG
  - Collateral policy — Risk Management Unit
  - Preparation of the proposal to the CBS decision-making body — EWG
  - Preparation of the response to the counterparty’s request — FMD, under the control of the EWG
- Preparedness and simulations:
  - Annual ELA simulation exercises recommended; mission ran a comprehensive simulation using actual balance sheet of a systemically important bank.
  - Simulation findings (selected figures from exercise):
    - Bank funding mix: approximately 61 percent sight and callable deposits and 12 percent fixed-term deposits.
    - Around 30 percent of assets held in FX (majority abroad).
    - Bank held roughly 15 percent of assets in government securities.
  - Simulation steps included eligibility checks, solvency/viability evaluation, ELA envelope calibration, FX assistance determination, assistance parameter calibration, master agreement preparation, communication, and collateralization.

### VI. Collateral Framework — Eligibility, Valuation, and Risk Mitigation
- Collateral framework components:
  - Eligibility requirements; valuation methodologies; risk control measures including haircuts, margining, concentration limits, and overcollateralization.
- Differences between monetary operations and ELA:
  - Objective: Price stability (monetary) vs Financial stability (ELA).
  - Eligibility: High-quality liquid assets (monetary) vs Broader collateral acceptance (ELA).
  - Collateral preference: asset selection by banks (monetary) vs defined by central bank (ELA).
  - Rule vs discretion: rules (monetary) vs central bank discretion (ELA).
  - Valuation and haircuts: public for monetary operations; nonpublic for ELA.
- Collateral eligibility and preference:
  - CBS should establish algorithmic preference order by liquidity, legal certainty, valuation, volatility, total volume on issue, and distribution.
  - Assumption: any asset on a bank’s balance sheet is a priori acceptable unless prohibited by law.
  - For monetary operations: mission assessment supports restricting eligibility to DAA and government securities.
  - Collateral-related liquidity gaps: Bank 1 and Bank 4 have gaps of approximately 10 percent (figures expressed as a percentage of bank balance sheets: ((liquid assets + government securities)–runnable liabilities)/total assets).
  - As of May 2025, SCR-denominated government securities: about SCR 4.5 billion.
- Collateral valuation:
  - Principle: mark-to-market where feasible; theoretical models otherwise.
  - Government securities valuation approach: summing discounted cashflows; Nelson-Siegel-Svensson for term-structure interpolation.
  - Recommend methodologies for illiquid and nonmarketable assets (loans, mortgages), use of external valuation agents, collateral pre-positioning.
  - Integrated pricing hubs: input data module and valuation module for each eligible asset.
- Risk mitigation measures and haircuts:
  - Haircuts to reflect liquidity, market, credit, and additional risks (exchange rate, valuation/model uncertainty, time-to-liquidation, mobilization/legal risks).
  - Current haircut scheme: CVaR-based, primarily captures market risk; time-to-liquidation not incorporated; existing haircuts appear lower than other central banks’ schemes.
  - Recommended approach: combine VaR with duration approximation and stressed bond yield volatility (DASV) as tail risk measure.
  - DACR model: Duration Approximation with Cross-country Regression to construct term spreads and calibrate haircuts for longer maturities.
- Mission calibration example (inputs used):
  - Time-to-liquidation: assumed up to three months to liquidate government securities after counterparty default (time-to-duration set to three months; time-to-liquidation set to one quarter).
  - Standard deviation: set to 240 basis points (volatility of average weekly-change in government bills yields between January 2020 and May 2025).
  - Term spread: set to zero (mission did not calibrate the term spread).
  - Model outputs: haircut schedules shown for different central bank risk appetite 훼 (1−훼 being haircut percentile); example: 훼=1% VaR implies more conservative haircut scheme.
- Example maturity-bucket haircut schedule (government bond-derived; exact figures preserved):
  - Duration range / Assigned duration / Haircut (95%-tile) / Haircut (98%-tile) / Haircut (99%-tile)
    - (0,0.5] / 0.5 / 1.2% / 1.5% / 1.7%
    - (0.5-1] / 1 / 2.3% / 2.9% / 3.3%
    - (1-3] / 3 / 6.9% / 8.5% / 9.6%
    - (3-5] / 5 / 11.2% / 13.7% / 15.4%
    - (5-7] / 7 / 15.3% / 18.7% / 20.9%
    - (7-10] / 10 / 21.1% / 25.6% / 28.5%
    - >10 / 20 / 37.7% / 44.6% / 48.8%
- Haircut governance:
  - Calibrate haircuts at a relatively low frequency—such as every two years—to avoid procyclicality.
  - Maintain a haircut revision calendar with pre-announced dates (e.g., one month in advance) or exceptional reviews in crisis.
- Collateral acceptance ordering and scores (selected exact scores):
  - DAA: 16
  - Government securities: 18
  - Domestic FX deposits: 19
  - FX deposits abroad: 24
  - Government stocks: 24
  - Overdrafts: 25
  - Term loans: 27
  - FX overdrafts: 28
  - Loans and advances: 28
  - FX bonds: 30
  - FX loans: 30.5
  - Mortgages: 32
  - FX mortgages: 33.5
  - Intangible assets: 40
  - Financial lease: 43
  - Fixed assets: 43

### VII. Implementation Timeline and Follow-up TA
- Implementation will require several months of work across CBS divisions.
- Mission offered follow-up assistance:
  - Desk review of documents drafted by CBS teams.
  - Brief follow-up assistance contemplated to sign off on framework before endorsement by CBS decision-making body.
- Follow-up TA objectives:
  - Ensure framework, including collateral policy (haircut calibration for credit claims) and forward-looking solvency assessment, is aligned with guidance.
  - Address any open issues before adoption.
  - Additional TA from financial stability to develop robust forward-looking solvency assessment if needed.

*Source: IMF Technical Assistance Report — Preface, Executive Summary, Introduction, and selected sections (tarea2026020-source-pdf).*

### Preface ................................................................................................................

### Preface

### Mission and engagement
- A Monetary and Capital Markets (MCM) Department Technical Assistance (TA) mission visited Victoria from August 10 to 21, 2025, at the request of the Central Bank of Seychelles (CBS).
- Purpose: assist the authorities in the development of Emergency Liquidity Assistance (ELA) and collateral frameworks.
- Meetings conducted with CBS management and staff, including:
  - Ms. Caroline Abel, Governor of the CBS;
  - Mr. Brian Commettant, First Deputy Governor;
  - Mr. Mike Tirant, Second Deputy Governor;
  - Management and staff from Financial Markets, Financial Surveillance, Research and Statistics, Banking Services, and the Legal Unit.
- Additional meetings with Mr. Patrick Payet, Secretary of State of the Ministry of Finance, National Planning, and Trade (MoF), and other MoF staff, and the Managing Director and/or Treasurer of three commercial banks operating in Seychelles.
- The mission thanks CBS staff for data, discussions, engagement, and logistical support.

### Context and legal framework
- Work responds to the recommendation of the 2023 IMF Safeguards Assessment to operationalize the ELA framework following revised legislation.
- The amended CBS Act of 2024 provides a legal foundation for implementing ELA in line with IMF standard recommendations.

### Key deliverables of the mission
- Support in developing and operationalizing ELA provisions under the amended CBS Act of 2024.
- Guidance to replace the Emergency Lending Facility (ELF), introduced in 2009, with a proposed ELA framework aligned to international best practice.

---

### Executive Summary

### Objectives of the proposed ELA framework
- Preserve financial stability.
- Minimize moral hazard from ELA interventions.
- Safeguard the central bank’s core mandates, including price stability, solvency, and institutional independence.

### Assessment of the Seychelles banking system and current liquidity tools
- Banking system described as generally robust and well capitalized with comfortable liquidity buffers.
- Most banks are part of international banking groups and generally expected to have access to parent-institution liquidity support.
- Current CBS liquidity instruments include:
  - Standing Credit Facility (SCF) — an overnight facility within the monetary policy toolkit.
  - Emergency Lending Facility (ELF) — introduced in 2009 and divergent from principles of effective ELA.

### Design and publication of an ELA regulation
- CBS should develop and publish an ELA regulation upon Board approval to:
  - Manage stakeholder expectations.
  - Reinforce CBS accountability.
  - Articulate solvency, viability, and lender-of-last-resort provisions embedded in law.
- Regulation should be structured around:
  - Financial stability objective and discretionary nature of ELA.
  - Requirement for forward-looking assessments of solvency and long-term viability of applicants.
  - Obligation for full collateralization of the loan.
  - Application of a penalty interest rate, with pricing set at a significant spread (e.g., 200–300 basis points) above the SCF.

### Transparency, discretion, and disclosure
- Trade-off emphasized between discretion (to mitigate moral hazard) and transparency.
- Advice provided on disclosure approaches using ELA General Documentation developed by MCMCO.
- Public regulation should be complemented by published guidelines outlining financial soundness criteria required to access regular central bank operations.
- CBS currently applies an overarching financial soundness criterion for access to standard monetary policy operations; this criterion should be formally articulated and disclosed.

### Internal guidelines, responsibilities, and preparedness
- Regulation should be supported by comprehensive internal guidelines and robust calibration strategy for each policy parameter.
- Guidelines should:
  - Allocate internal responsibilities and define decision-making and workflow for assessing ELA requests.
  - Elaborate on forward-looking solvency and viability assessments and lender-of-last-resort application.
  - Address evaluation of the applicant’s funding plan, ELA conditionalities, and collateral management (preferences, ranking, haircuts, risk controls).
- Establish an internal ELA Working Group (EWG) to:
  - Draft the ELA regulation and develop internal procedures.
  - Lead communication and transparency strategy in line with the IMF’s Central Bank Transparency Code.
  - Remain active to maintain the framework and manage future ELA requests.
  - Run regular simulation exercises to preserve preparedness.

### Coordination with Ministry of Finance (MoF)
- CBS should engage with the MoF to establish a Memorandum of Understanding (MoU) on ELA.
- MoU should define:
  - Protocols for information exchange.
  - Circumstances under which ELA requires a government guarantee per the CBS Act.
  - Form and operational modalities of government guarantees.

### Collateral framework recommendations
- For monetary policy operations:
  - Given structured excess liquidity and reliance on the SCF, collateral eligibility can remain limited to CBS deposits and government securities without creating scarcity.
  - Limiting collateral supports transparency requirements and risk mitigation disclosure.
- For ELA:
  - CBS must be legally and operationally ready to accept nonstandard collateral, including domestic credit claims and FX-denominated marketable and nonmarketable assets.
  - Ensure legal ability to pledge such assets and develop operational procedures for mobilization, valuation, and risk control.
  - Conduct frequent collateral scanning to determine preference order, encourage collateral prepositioning for due diligence, and dedicate resources to valuation of nonmarketable or illiquid assets.

### Haircuts and risk calibration
- Haircuts should be calibrated using models that minimize impact on private-sector pricing of risk while protecting the CBS balance sheet.
- Models should account for liquidity, market, and credit risks, and the CBS’s risk appetite.
- Hands-on sessions discussed models and haircut calibration components.

---

### Recommendations (selected highlights from Table 1)

### ELA Regulation (Priority: High unless noted)
- Articulate and publish a regulation for an effective ELA framework. (Priority: High; Timeframe: Medium term)
- Define forward-looking solvency and viability requirements to be fulfilled in all cases (¶31). (High; Medium term)
- Specify the lender-of-last-resort criterion for provision of ELA (¶36). (High; Near term)
- Allow for strict conditionality (¶39, ¶40). (High; Near term)
- Specify that ELA will be priced at a positive premium of 200–300 basis points over the SCF (¶42). (High; Medium term)
- Determine the ELA envelope by estimated liquidity needs and cover a period of two weeks, with daily disbursements allowed within the overall agreed envelope (¶43). (High; Medium term)
- Restrict duration of ELA to within six months set by law (¶44). (High; Medium term)
- Disclose financial soundness requirements for monetary policy counterparties (¶21). (Medium; Medium term)
- Ensure legal, operational, and technical readiness for provision of ELA in foreign exchange (FX) with additional risk mitigation and stricter conditionality (¶45). (High; Near term)

### Internal Guidelines, Preparedness, and Communication Policy
- Set up an internal interdivisional working group to draft ELA regulation and internal procedures, run regular simulations, and handle ELA requests (¶58). (High; Near term)
- Internal procedures should specify responsibilities of divisions and internal decision-making (¶58, ¶60). (High; Near term)
- Run regular simulation exercises (¶61). (Medium; Medium term)
- ELA working group should specify ex-ante, ongoing (reactive and proactive), and ex-post transparency and communication policy concerning ELA (¶52, ¶53). (High; Near term)
- Develop a regular monitoring framework to anticipate potential liquidity risks (¶32). (Medium; Medium term)

### Memorandum of Understanding (MoU) with MoF
- Establish a MoU defining scope of information exchange, institutional roles, and the form, amount, process, and conditions of government guarantees per the CBS Act (¶55, ¶56). (High; Near term)

### Collateral Policy
- Develop legal and operational capacity to accept nonmarketable assets, including credit claims, as collateral for ELA (¶76). (High; Medium term)
- Implement valuation methodologies and risk mitigation measures for each collateral class as proposed (Sections III.D and III.E). (High; Medium term)
- Conduct regular collateral scanning to determine preference order for assets mobilizable for ELA (¶73). (Medium; Medium term)
- Encourage collateral prepositioning for due diligence (¶65). (Medium; Medium term)
- Dedicate resources to valuation of nonmarketable or illiquid marketable assets (¶77). (Medium; Medium term)
- Strengthen risk-mitigation measures to capture key market risks (¶89, ¶91). (Medium; Medium term)

Timeframe key: Near term: < 12 months; medium term: 12 to 24 months.

*Source: IMF Technical Assistance Report — Preface, Executive Summary, and Recommendations (tarea2026020-source-pdf).*

### Introduction

### Introduction

### Key findings on the existing ELF and legal reform
- The ELF, introduced by the CBS in 2009 to provide last-resort liquidity and mitigate bank runs, departs from principles of effective ELA in several respects:
  - The ELF guideline does not explicitly restrict access to solvent credit institutions nor incorporate a viability assessment.
  - Collateral eligibility is limited to assets accepted for monetary policy operations—namely, government securities.
  - Maturity is set at 60 calendar days with possible 30-day extensions, impeding effective monitoring and timely enforcement of crisis-management measures.
  - Pricing is set at 5 percentage points above the cost of the Standing Credit Facility (SCF) and is described as excessively punitive.
- An IMF Safeguards Assessment mission in 2023 recommended a comprehensive overhaul contingent on an amended CBS Act.
- The CBS Act amendment approved in 2024 strengthened the legal foundation for ELA by:
  - Defining eligibility: access limited to solvent and viable, but temporarily illiquid, deposit-taking institutions—banks and credit unions—on a last-resort basis and against adequate collateral.
  - Empowering CBS to determine eligible collateral assets on a case-by-case basis.
  - Explicitly providing for government guarantees where solvency, collateral sufficiency, or resolution funding concerns arise and financial stability is at risk.
  - Aligning ELA maturity with international best practices: daily disbursements within fortnightly envelopes and a maximum overall maturity of six months.

### Mission focus and report structure
- Mission objectives:
  - Operationalize the new legal provisions within a modern ELA framework.
  - Provide guidance on drafting regulation or accompanying guidelines consistent with the amended CBS Act.
  - Advise on internal CBS procedures and division of responsibilities.
  - Review CBS collateral frameworks for monetary policy operations and ELA, including eligibility, valuation, and model-based risk mitigation.
  - Explore operational aspects of credit claims mobilization to expand and flexibilize the collateral pool.
- Report structure:
  - Section I: financial and monetary landscape of Seychelles, banks’ liquidity management, CBS monetary operations and liquidity backstops.
  - Section II: ELA and operationalization of a comprehensive framework.
  - Section III: CBS collateral policy—assessment of existing framework and overarching collateral policy for monetary policy operations and ELA.
  - Section IV: further possible technical assistance for completing the project.

### *Source: tarea2026020-source-pdf - Introduction*

### I. Financial and Monetary Landscape — Financial Sector

- Size and composition of the financial sector (based on June 2025 balance sheet data):
  - Total financial sector assets: approximately 150 percent of GDP.
  - Commercial banks: 81 percent of total financial sector assets.
  - Pension funds: 10 percent.
  - General and life insurance companies: 3.7 percent.
  - Credit union: 1.5 percent.
  - Other nonbank financial institutions: 3.8 percent.
- Banking system structure and concentration:
  - Sector comprises seven entities: three subsidiaries of foreign banks, two branches of foreign banks, and two locally incorporated banks with government controlling stakes.
  - The three largest banks account for 87 percent of total banking system assets as of May 2025.
  - Herfindahl-Hirschman Index (HHI): 2687, indicating an overall concentrated banking system.
  - Interbank activity is limited and shows segmentation between the top three banks and remaining institutions.
- Funding and vulnerability indicators:
  - Customer deposits average 85 percent of total liabilities.
  - Equity represents 10.5 percent of total liabilities.
  - FX deposits constitute nearly 50 percent of total deposits.
  - Nonfinancial corporate deposits: on average 43 percent of total deposits, up to 64 percent in one bank.
  - Deposits from other financial institutions: 16 percent of total deposits overall, concentrated at 36 percent and 28 percent in two banks respectively.
  - Sight and savings deposits account for approximately 75 percent of total deposits and over half of total bank liabilities.
  - Deposit dollarization stands at nearly 50 percent.
- Additional constraints and risks:
  - CBS statutory liquidity requirement mandates banks to hold at least 20 percent of their liabilities in liquid assets and does not differentiate by currency, allowing banks to hold less than 20 percent in liquid FX assets.
  - The CBS may face constraints in providing ELA in foreign currency due to limited FX reserves; existing ELF guidelines restrict ELA to Seychelles rupees (SCR) only.
- Nonbank institutions:
  - No money market or investment funds operate in Seychelles.
  - Pension funds and life insurance companies are not subject to significant liquidity pressures.
  - General insurance companies have flexibility in timing of claim payments and are backed by technical reserves, reducing bank-run-type liquidity risk.

### I. Financial and Monetary Landscape — The CBS Operational Framework

- Monetary policy framework:
  - Since 2019, CBS uses an interest rate-based monetary policy framework with a Monetary Policy Rate (MPR) and an interest rate corridor.
- Operational implementation:
  - CBS operates a mid-corridor system targeting a market rate.
  - Weekly variable-rate auctions of seven-day fixed-term deposits: Deposit Auction Arrangement (DAA).
  - Fortnightly auctions of one-month and two-month deposits in which CBS acts as a price taker.
  - CBS aims to absorb approximately two-thirds of excess liquidity through weekly seven-day auctions; currently, over half of excess liquidity is absorbed via one-month and two-month deposits.
- Liquidity conditions and reserves (figures based on CBS data):
  - Banks maintain cash balances broadly equivalent to the reserve requirement.
  - Average excess reserves range between SCR 100 million and SCR 150 million per maintenance period.
  - CBS estimate of structural precautionary balance: SCR 50 million.
- Standing facilities and pricing:
  - SCF and Standing Deposit Facility (SDF) define the interest rate corridor at 150 basis points above and below the MPR, respectively.
  - SCF availability: daily between 3:00 p.m. and 4:00 p.m., approximately 30 to 60 minutes after closing of payment and settlement systems.
  - Eligible collateral for the SCF includes fixed-term deposits at the CBS, SCR-denominated Treasury bills, and government securities.
  - SCF usage: since the beginning of 2024, accessed only five times.
- Minimum Reserve Requirements (MRR):
  - MRR ratio: 13 percent on both rupee and foreign currency deposits of residents; applied to all deposit liabilities of banks excluding interbank deposits.
  - Maintenance period: one month, from the second Wednesday of the month to the second Tuesday of the following month.
  - MRR for U.S. dollar deposits must be maintained in U.S. dollars; for euro deposits in euros; for other foreign currency deposits in U.S. dollars.
  - Full averaging provisions apply.
  - Penalty rate for nonfulfillment of the MRR: twice the MPR.
- Operational limitations and communication:
  - No intraday liquidity facility currently due to technical constraints in the payment and settlement system; constraints are being addressed.
  - Operational guidelines for individual instruments are accessible, but there is no dedicated document on the CBS website outlining the overall liquidity management framework and guiding principles.
  - CBS maintains an overarching financial soundness criterion for access to standard monetary policy operations, but it has not been coherently or formally articulated internally or publicly.
- Mission recommendation:
  - CBS should formally articulate and publish financial soundness requirements for monetary policy counterparties, defining financial soundness indicators and prudential minimums in a public document with a rule-based framework and progressive remedial measures, including limiting or suspending access to credit operations for noncompliance.
- Role of ELA in the liquidity defense architecture:
  - ELA complements money markets, standard operations, and precautionary reserves as the final line of defense when other mechanisms are insufficient.

### II. Emergency Liquidity Assistance — Background and Current Framework

- ELF (historical design and limitations):
  - Introduced in 2009 to address severe short-term liquidity shocks not met through the SCF.
  - Under the ELF:
    - CBS may lend to deposit-taking institutions in SCR against eligible collateral used for monetary operations after considering financial stability concerns.
    - Initial provision period: 60 days, extendable in 30-day increments.
    - Interest rate: 500 basis points above the SCF rate.
    - ELF requests must be accompanied by a repayment plan.
    - ELF does not explicitly state that support is only for solvent banks, although CBS considers solvency when evaluating requests.
  - Shortcomings:
    - Lack of an explicit solvency/viability requirement.
    - Collateral restricted to assets used in monetary policy operations, limiting support during acute stress when banks may lack standard collateral.
    - Rigid tenor and maturity provisions.
    - High interest rate (500 basis points above SCF).
    - Restriction to SCR-denominated lending only.
    - No provisions delineating the government's role in guarantees or conditionality for liquidity support.
- Post-amendment reform process:
  - IMF Safeguards Assessment recommended enhancing the ELF framework after CBS Act amendment; amendment passed in 2024.
  - Mission assisted CBS to develop a modern ELA framework, advising on:
    - Review and issuance of a new regulation disclosing key elements of an effective framework.
    - Development and implementation of comprehensive internal guidelines.
    - Strengthening the collateral framework.
    - Clarification of the government's role within the framework. 

*Source: tarea2026020-source-pdf - Introduction*

### 26. The CBS Act, as amended in 2024, provides sufficient legal provisions for an effective

### 26. The CBS Act, as amended in 2024, provides sufficient legal provisions for an effective

### ELA legal basis and key features
- The amended Act:
  - clearly defines the eligibility criteria for ELA, targeting solvent and viable—but temporarily illiquid—deposit-taking institutions (banks and credit unions), as a last resort and against adequate collateral.
  - authorizes CBS to determine, on a case-by-case basis, the assets to be accepted as collateral.
  - explicitly recognizes the government’s role in contributing to financial stability, including the provision of guarantees in cases where there are concerns about solvency or adequacy of collateral, or when funding is required for resolution and financial stability is at risk.
  - defines ELA maturity in line with best practices, with daily disbursements within envelopes set fortnightly and a maximum overall maturity of six months.

### Operational guidance and framework objectives
- The mission’s guidance emphasizes that an effective ELA framework must:
  - support financial stability through effective ELA interventions;
  - minimize the moral hazard associated with such interventions;
  - safeguard the central bank’s core objective of price stability and its autonomy.
- A comprehensive framework should include:
  - a legal basis, regulation, and internal guidelines;
  - the government's role;
  - crisis preparedness and a communication strategy;
  - an appropriate collateral policy (discussed in the next chapter).

### Internal guidelines and policy parameters
- Internal guidelines comprise three key elements:
  - assessing eligibility;
  - assessing conditionality;
  - determining the financial parameters.
- These internal procedures should be carefully designed, with a comprehensive description of requirements, operational checks, and decision rules, to ensure operational effectiveness and central bank accountability.

### Eligibility requirements
- Institutions must:
  - (i) be legally eligible;
  - (ii) be solvent on a forward-looking basis and deemed viable; and
  - (iii) have exhausted all other available funding sources.
- Additional points:
  - Only supervised banks should qualify for ELA. Article 29(B)(1) of the amended CBS Act grants eligibility to banks and credit unions in Seychelles; as of the mission, all banks and credit unions meet this initial eligibility criterion.
  - Solvency and viability are prerequisites and related assessments must be conducted within a short time frame.
- Forward-looking solvency and viability assessments:
  - A forward-looking solvency requirement is essential for ELA; it allows ELA to be extended to a temporary undercapitalized bank provided there is a credible prospect that capital will be maintained or restored above the prudential minimum within a reasonable period (e.g., six months or lower given legal constraint on the term). This time frame could be specified in the regulation.
  - A viability assessment is “business model” focused, examining business strategy, asset quality, governance and management, earnings, liquidity, and risk management processes; it assesses the entity’s capacity to generate sufficient cash flow to repay ELA and may identify conditional reforms.
  - Viability assessment often requires input from the Financial Market Division (FMD) and the Financial Stability Section (FSS).
- Timeliness and capacity:
  - The FSS must be capable of evaluating within 24 hours an institution’s forward-looking solvency and viability as input for the final decision.
  - Regular solvency stress testing—adapted to meet ELA requirements, such as using a six-month horizon and factoring in higher funding costs—can enhance preparedness.
- Financial stability risk assessment:
  - Before granting ELA, a financial stability risk assessment should be conducted, recognizing systemic importance may differ from ex-ante classifications.
  - Criteria for systemic relevance in ELA include: (i) size (market share of deposits and/or lending, interbank market activity, payment system importance); (ii) complexity; (iii) substitutability; (iv) interconnectedness; and (v) contagion risks.
  - When solvency is in doubt, risks could be mitigated by a government guarantee (Section II.E).
- Scope of eligibility:
  - The mission assesses no need to extend eligibility to nonbank financial institutions (NBFIs) nor to review the law in that respect, citing reasons including different regulatory regimes, limited runnable liabilities, and lack of critical intermediary roles.
- Exhaustion of alternative funding:
  - Internal guidelines should ascertain that the applicant has exhausted all short-term alternative funding sources (secured and unsecured money markets, liquidity lines with parent institutions abroad, and the CBS’s SCF) and require mandatory submission of supporting information.
- Foreign-owned entities:
  - For subsidiaries of foreign banks, the applicant must fully exhaust parent funding, including committed lines, and all available home central bank funding before being considered for ELA.
  - The CBS may need to establish a MoU with home supervisory authorities and participate in international colleges of supervisors to support cooperation and information exchange.

### Conditionality
- A credible funding plan is a crucial condition for ELA:
  - An initial funding plan should be included in the ELA request; CBS should finalize the plan with the counterparty within days of the first disbursement.
  - Funding plan templates and workshops/seminars can help meet emergency deadlines.
- Possible restrictions CBS might impose to ensure funds are used for core business and to expedite exit from ELA:
  - Equity buybacks can be prohibited; funds can be used to meet debt repayments as they become due.
  - Funds should not be used to facilitate nonessential or risky lending practices, distribution of dividends, or bonuses/salary increases for management.
  - For foreign subsidiaries, protection against “upstreaming” funds to parents should be enforced through formalized arrangements with host supervisors.
- Conditionality may include institution-specific measures to address governance and risk management failures revealed in viability assessments; regulation should enable CBS to impose such measures.

### ELA financial parameters and collateral
- Pricing:
  - ELA should be priced at a positive premium over the highest monetary policy facility rate.
  - For Seychelles, the mission recommends applying the premium over the SCF.
  - The typical recommended range for this premium is 200–300 basis points.
- Envelope and disbursement mechanics:
  - An ELA envelope should be calculated based on the institution’s forecasted liquidity requirements, typically over a two-week period.
  - The bank must submit a detailed cash flow forecast for the upcoming two weeks, distinguishing asset-related and liability-related flows, and allowing the bank to maintain a minimum liquidity buffer.
  - Disbursements should occur daily to meet daily liquidity needs within the overall ELA envelope; detailed cash flow and deposit flow forecasts should be monitored daily and reviewed at each biweekly ELA rollover.
- Maximum duration and governance:
  - The maximum duration for ELA should be established within the six-month limit set by law.
  - Disbursements should be based on a two-week approved envelope from the CBS Board of Directors, which sets the maximum liquidity that can be extended by the FMD without further approval.
  - At the end of each two-week period, the forecasted ELA need should be recalibrated and a new envelope allocated; a maximum term for ELA provisioning should be specified in the regulation.
- ELA in foreign currency:
  - CBS should ensure operational and technical readiness for ELA in FX, supported by additional risk mitigation measures and stricter conditionality, because banks are exposed to FX liquidity risk despite FX liquidity buffers.
  - CBS regulations require banks to hold liquid assets not less than 20 percent of the bank’s total liabilities per the Financial Institutions (Liquidity Risk Management) Regulations (2009).
  - Banks are allowed to hold SCR-denominated assets against FX liabilities, and a 30 percent Net Open Position (NOP) limit enables currency arbitrage.
  - Limiting ELA to SCR only could force banks to borrow in SCR to meet FX needs, causing FX market dislocations and exchange rate risk.
  - ELA in FX should be subject to higher haircuts, stricter conditionality, more intrusive supervision, and may be priced at a higher premium than SCR ELA.
- Currency-specific liquidity ratios:
  - Ex ante, CBS may consider differentiating the liquidity ratio by currency, requiring banks to hold at least 20 percent of liquid assets in the same currency as their liabilities; this may be prescribed only for significant currencies accounting for more than 5 percent of total liabilities.
  - CBS may consider setting a higher liquidity ratio specifically for FX liabilities to minimize the need to provide FX ELA.
- Collateral policy:
  - The ELA envelope should be fully collateralized throughout the duration of the ELA loan.
  - The ELA collateral policy should be integrated into the broader collateral framework (Section III) and include clearly defined eligibility criteria, robust valuation processes, and adequate risk mitigation measures.
  - The ELA-specific framework extends standard criteria to accommodate less liquid collateral (e.g., credit claims) with more tightly calibrated haircuts, concentration limits, and overcollateralization.
  - In the absence of sufficient collateral, CBS should have an agreement with the government, including a guarantee for ELA provision (Section III.E).

### Transparency and communication
- A comprehensive ELA transparency and communication strategy should include:
  - (i) an ex-ante transparency policy;
  - (ii) a communication strategy for ongoing ELA operations; and
  - (iii) an ex-post transparency and disclosure policy.

### Ex-ante transparency
- Ex-ante transparency involves disclosing selected elements of the ELA framework in a public regulation to manage stakeholder expectations and support accountability.
- The regulation should define broad terms and conditions, including:
  - (i) the financial stability objective behind the operation and its discretionary nature;
  - (ii) the requirement for forward-looking solvency and long-term viability of the ELA applicant;
  - (iii) the necessity for the ELA to be always fully collateralized; and
  - (iv) the requirement to provide ELA at a penalty interest rate.
- Sensitive aspects (collateral preference order, valuation, and risk control measures) should remain confidential, while transparency on governance, processes, conditionalities, and the level of the ELA interest rate is recommended to enhance preparedness and public understanding.
- The regulation should emphasize the discretionary nature of the ELA, avoiding terms such as “facilities”.

*IMF Technical Assistance Report*

### 51. In crafting the regulation, consistency should be ensured with internal guidelines and

### 51. In crafting the regulation, consistency should be ensured with internal guidelines and 

### Real-time transparency
- The CBS should establish a communication strategy within its ELA internal guidelines, ensuring it can be promptly deployed in an ELA scenario.
- Real-time disclosure is generally not recommended for ELA, but a communication strategy can:
  - Address market rumors.
  - Respond to public inquiries when necessary (e.g., evidence of increased bank lending reflected in the monthly publication of the CBS balance sheet).
- Stress indicators for an institution may be inferred from its balance sheet or market pricing.

### Ex-post communication
- The CBS should develop ex-post communication guidelines to ensure accountability while avoiding disclosures that could exacerbate liquidity stress.
- Caution is warranted during periods of financial stress; premature disclosure of liquidity support to an individual institution could trigger contagion and heighten risks to financial stability.
- Identifying the ELA recipient may eventually be required under public disclosure obligations—ideally at least one year after the ELA has been repaid.
- When disclosure is required, communication should focus on the actions taken in accordance with the framework and the outcomes achieved.
- The mission advises the CBS to refer to the IMF Transparency Code as a foundation for developing a comprehensive transparency strategy for the ELA framework.
- Annex IV provides an illustration of the code’s application (as referenced in the document).

### Agreement with the Government
- The CBS and the MoF should establish a MoU that clearly defines the scope of information exchange and the specific roles of each institution.
- The MoU should detail types of information that can be shared, particularly where a government guarantee may be required.
- The MoU should explicitly state that:
  - (i) both the CBS and the government share the mandate for financial stability; and
  - (ii) the CBS’s operational independence must always be preserved in any ELA-related decision.
- The MoU can be standalone or incorporated within the existing financial stability MoU between the CBS and the MoF; it is also signed by the Financial Services Authority and Financial Intelligence Unit.
- Given multiple signatures in the current MoU and if the Financial Services Authority and Financial Intelligence Unit are not key ELA stakeholders, a standalone document may be more appropriate.
- The CBS and the MoF should formalize a process for granting guarantees for ELA. Government guarantees may be required when:
  - (i) there is a risk of undercollateralization—where the government would cover the remaining (noncollateralizable) liquidity needs;
  - (ii) the institution’s solvency is uncertain—stemming from the forward-looking nature of the solvency assessment (Figure 7);
  - (iii) ELA is used for funding-in-resolution and concerns over the exit strategy arise—such as when the institution undergoing resolution has uncertain forward-looking solvency or viability, or where the CBS’s liquidity provision cannot be fully collateralized.
- The provision of ELA for funding-in-resolution should be determined on a case-by-case basis and not triggered automatically.
- Any guarantee must be legally enforceable, irrevocable, and unconditional, ranking pari passu with the government’s other senior obligations.
- The CBS should define circumstances under which a guarantee will be sought and document them in both the MoU and its internal ELA procedures.
- Particular attention should be given to government transparency regarding guarantees:
  - A proposal in debt management legislation would require the MoF to notify Parliament of any government guarantee to the central bank within 90 days of its issuance.
  - This provision should not jeopardize financial stability or impair the effectiveness of ELA; heightened transparency during an ongoing ELA could precipitate the very financial stability crisis that ELA is designed to prevent (Section II.D).
  - Possible mitigations: implement the transparency requirement without disclosing case-specific details until after resolution; extend the reporting deadline to six months, allowing disclosure only six months after the ELA has been repaid; consider exceptions to the transparency requirement on financial stability grounds.
  - Given the overall size and depth of the market, the risk of spillover via overall sentiment effects is high and extra caution is needed on any disclosure.

### Operationalization of ELA
- Establish comprehensive cooperation frameworks by forming an ELA Working Group (EWG) with responsibilities to:
  - Draft the regulation.
  - Develop internal procedures.
  - Run regular simulations.
  - Handle ELA requests.
- Chairing the EWG could fall to the FMD, consistent with international best practices and IMF recommendations.
- The existing ELF has been in the remit of the FSS, which also hosts supervising duties; this may bias solvency assessments if FSS continues to lead.
- The mission advises establishing (or relocating the ELA lead of the EWG) in the FMD; FMD resources may need to be bolstered.
- EWG membership should include representatives from Financial Surveillance, Research and Statistics divisions, Legal and Communications units.
- Develop detailed terms of reference focusing on preparedness and documented procedures with clear division obligations.

- Process and timing:
  - Aim to complete evaluation of ELA requests within 24 to 48 hours.
  - The assessment process comprises three key elements:
    - (i) evaluating the applicant’s eligibility;
    - (ii) formulating the conditionality of the ELA loan;
    - (iii) calibrating the financial parameters.
  - Preparatory steps—drafting funding plans, ELA requests, and ELA master agreements—can be prearranged and published on the CBS website.
  - ELA disbursement may proceed only after these elements are satisfactorily addressed by the CBS’s decision-making body.

- Decision-making authority:
  - The Board is attributed decision-making responsibility concerning the ELF; this arrangement can be retained for ELA.
  - ELA decisions require prompt responses and should be collegial; assigning sole responsibility to the Governor could raise concerns over favoritism and expose the Governor.

- Table 2: Division Responsibilities for Evaluation of an ELA Request (responsibilities listed exactly as in the source):
  - Solvency assessment — Financial Surveillance
  - Viability assessment — Financial Surveillance
  - Systemic risk assessment — Financial Surveillance
  - Unavailability of alternative sources of funding — FMD and Financial Surveillance
  - Funding to banks in resolution: to provide input on solvency assessment and exit strategy — Resolution Unit
  - Preparation and implementation of funding plans, including conditionality and escalation triggers — FMD and Financial Surveillance
  - Prescription of conditionality in the ELA agreement — Financial Surveillance and Legal Unit
  - Calibration of ELA envelope — FMD
  - Preparation of ELA master agreement, collateral agreements, and indemnities — Legal Unit
  - Implications of ELA for monetary policy — FMD, Financial Surveillance, and Research and Statistics
  - Information exchange with the MoF in relation to indemnities — EWG Chair—Head of FMD
  - Communications strategy — EWG and Communications Unit
  - CBS disclosure — EWG
  - Collateral policy — Risk Management Unit
  - Preparation of the proposal to the CBS decision-making body — EWG
  - Preparation of the response to the counterparty’s request — FMD, under the control of the EWG

- Preparedness and simulations:
  - The CBS should regularly conduct ELA simulation exercises; annual simulations are advisable while mindful of resource implications.
  - Over time, exercises may involve banks to strengthen their preparedness.
  - To preserve discretion and mitigate moral hazard, information on critical policy parameters should be disclosed solely on a nonbinding basis.
  - The mission institutionalized a simulation framework at the CBS and tested it through a comprehensive ELA simulation using the actual balance sheet of a systemically important bank (a subsidiary of a foreign institution).
    - At the time of the simulation, the bank’s funding mix consisted of approximately 61 percent sight and callable deposits and 12 percent fixed-term deposits.
    - Around 30 percent of its assets were held in FX, the majority of which was located abroad.
    - The bank held roughly 15 percent of its assets in government securities, which could be used to collateralize the SCF.
    - The simulation assumed a large-scale deposit withdrawal triggered by concerns about the parent bank, which was unable to provide liquidity support.
    - The exercise focused on, inter alia: assessing whether funding should be provided in FX and evaluating implications for exchange rate exposure and the NOP limit.
  - The simulation implemented guidelines and procedures with key steps including:
    - (i) assessing the bank’s lender-of-last-resort situation and exhaustion of alternative funding sources;
    - (ii) evaluating forward-looking solvency and viability;
    - (iii) assessing the funding plan and calibrating the ELA envelope;
    - (iv) determining whether ELA should also be provided in foreign currency, considering exchange rate exposure under different scenarios;
    - (v) calibrating assistance parameters (e.g., maturity and rates) and designing ELA conditionalities;
    - (vi) preparing an ELA master agreement and the loan contract;
    - (vii) managing real-time communication around ELA; and
    - (viii) collateralizing the ELA envelope in accordance with the discussed collateral policy.
  - The FMD spearheaded the exercise and prepared the presentation for the ELA case; a proposal was presented and the exercise was attended by approximately 12 CBS employees.

- Collateral pre-positioning and mobilization:
  - Additional preparedness involves pre-positioning collateral and conducting regular tests for mobilization.
  - Pre-positioning includes identifying and validating collateral—without transferring legal title to the central bank at this stage.
  - Once due diligence is satisfactorily completed, collateral is considered pre-positioned and ready to be drawn against, subject to central bank approval.
  - Participants should update their list of pre-positioned collateral monthly.
  - The CBS could hire external legal counsel to inspect loan documentation; many central banks ask banks to hire external firms to conduct and report due diligence on pre-positioned collateral.
  - Mandatory pre-positioning of collateral is generally not recommended but may be encouraged for institutions with deteriorating liquidity buffers.
  - In jurisdictions facing systemic scarcity of marketable assets, mandatory collateral pre-positioning may be appropriate for standard monetary policy operations, but applying such a requirement to ELA is more complex and may be interpreted as a pre-commitment by the central bank.
  - The CBS could conduct testing exercises with counterparties focused on identification and mobilization of nonstandard collateral, particularly credit claims.
  - Counterparties should assess and ensure legal and operational readiness to mobilize such assets.
  - The CBS could share minimum procedural and eligibility requirements for credit claims on a nonbinding basis to help counterparties identify available and unencumbered assets in advance.
  - Communication on eligibility criteria should remain carefully calibrated to preserve CBS discretion in an ELA request.

### Collateral Frameworks
- Legal foundation:
  - The amended CBS Act provides the legal foundation for CBS lending activities supporting price and financial stability mandates.
  - Section 29(2) authorizes the CBS to extend credit to counterparties for monetary policy purposes.
  - Section 29B(1) establishes the legal basis for collateralized lending under the ELA framework, serving as a financial stability instrument.
  - For both objectives, the Act (see Section 29(3)(b) and Section 29B(1)(b)) empowers the CBS to determine the adequacy of collateral.
- Current collateral policy (summary of the CBS’s existing framework):
  - Eligibility: Eligible assets are restricted to DAA of the CBS and SCR-denominated government securities. These eligibility criteria are specified in Section 8 of the Monetary Policy Framework.
  - Valuation: Per the Operational Guidelines for Policy Tools, government securities are marked to market by determining their net present value, summing the discounted cashflows. DAA are taken at face value.
  - Risk mitigation measures: Haircuts are set by asset category and duration (Figure 9). The CBS applies Conditional Value-at-Risk (CVaR) for haircut calibration, mainly to capture market risk that is price volatility risk. Haircuts are calibrated for different maturities to account for duration risks.
- The remainder of the section assesses best practices for collateral policy and provides recommendations for a comprehensive collateral framework, differentiating between monetary policy and ELA collateral policies.

*IMF Technical Assistance Report — extracted content*

### 71. A coherent collateral framework comprises several key components: (i) eligibility

### 71. A coherent collateral framework comprises several key components: (i) eligibility

### Framework components and calibration
- Key components: (i) eligibility requirements; (ii) valuation methodologies; and (iii) risk control measures, including haircuts, margining provisions, concentration limits, and overcollateralization procedures.
- Policy parameters should be calibrated to:
  - contain financial and operational risks within the central bank’s defined risk appetite;
  - minimize price distortions across asset classes that could adversely affect credit allocation.
- Framework should support market development, for instance, through the adoption of standardized approaches.
- For each component, parameters should balance risk containment with minimizing market distortions.

### Differences: Monetary operations versus ELA (Table 3 summary)
- Objective:
  - Monetary Policy Operations: Price stability
  - ELA: Financial stability
- Eligibility:
  - Monetary Policy Operations: High-quality and liquid assets
  - ELA: Broader collateral acceptance
- Collateral preference:
  - Monetary Policy Operations: None (asset selection by banks)
  - ELA: Defined by the central bank
- Rule versus discretion:
  - Monetary Policy Operations: Rules
  - ELA: Central bank discretion
- Valuation:
  - Monetary Policy Operations: Disclosure of key methodological elements
  - ELA: Nondisclosure to the public
- Haircuts:
  - Monetary Policy Operations: Public
  - ELA: Nonpublic
- Concentration limits:
  - Monetary Policy Operations: (Generally) None
  - ELA: Applicable

### Collateral eligibility (CBS guidance and assessments)
- CBS should establish a methodology for determining the preference order for each collateral, with an algorithm in Annex V ordering collateral by liquidity, legal certainty, valuation, volatility, total volume on issue, and distribution in the financial sector.
- Assumption: any asset on a bank’s balance sheet, unless explicitly prohibited by law, is a priori acceptable as collateral.
- Established preference order should be used across monetary policy and ELA operations.
- CBS should demarcate collateral accepted in normal times (monetary policy) versus stress (ELA); the demarcation depth balances banks’ refinancing needs and required quality/transparency of monetary policy collateral.
- Mission assessment: collateral eligibility restricted to DAA and government securities is appropriate for monetary operations.
  - As of May 2025, SCR-denominated government securities are about SCR 4.5 billion in the banking system.
  - SCF was requested five times in 2024 (maximum amount SCR 100 million).
  - Since the beginning of 2024, the stock of domestic debt in rupees has dropped by around SCR 1.5 billion based on CBS data.
- Distribution risks:
  - Bank 7 does not hold government securities and therefore would not have access to central bank money despite holding significant liquid assets.
  - Long-run constraint: dearth of eligible collateral may increasingly constrain banks’ access to regular CBS operations.
- For ELA:
  - CBS should broaden collateral pool and employ collateral scanning to assess banks’ resilience to liquidity stress and adequacy of collateral eligibility.
  - Collateral scanning compares banks’ short-term liquidity needs against available collateral and informs trade-offs between narrower and broader frameworks.
- Collateral-related liquidity gaps:
  - In aggregate, banks’ liquid assets (including government securities) appear sufficient to cover runnable liabilities, but several institutions exhibit collateral-related liquidity gaps.
  - Runnable liabilities comprise checking, savings, and interbank deposits; Seychelles rupee liabilities shown by broken line and total liabilities (local and FX) by solid line (Figure 10).
  - For Bank 1 and Bank 4, the gap between runnable liabilities and liquid assets, including SCF-eligible government securities, is approximately 10 percent (figures expressed as a percentage of bank balance sheets: ((liquid assets + government securities)–runnable liabilities)/total assets).
  - These gaps would widen further under mark-to-market valuation and haircut application.
  - Significant share of deposits held abroad introduces interest rate and legal mobilization risks, underscoring need for enhanced liquidity monitoring and risk controls.
- In ELA, CBS should apply the established collateral preference order and exercise discretion over scope of collateral acceptance.

### Collateral valuation
- Principle: mark-to-market based on robust and consistent valuation principles; rely on market-based valuations where feasible, theoretical models when necessary.
- Mission assessment of current methodologies:
  - Government securities valuation methodology is appropriate given shallowness of domestic securities market.
  - Secondary securities market is effectively nonexistent; government bills (three months, six months, one year) are auctioned weekly, enabling periodic price observation in the primary market.
  - Theoretical valuation method for government bills: discounting the nominal value of zero-coupon instruments.
  - Government bonds issued quarterly; existing approach of summing discounted cash flows is adequate.
  - Yields determination uses Nelson-Siegel-Svensson methodology for term-structure interpolation.
- Recommendations:
  - CBS should leverage its sovereign yield curve to price corporate securities in a shallow market.
  - CBS should establish robust methodologies for illiquid and nonmarketable assets (loans, mortgages) for ELA operations.
    - Collateral pre-positioning is useful for managing nonmarketable assets; pre-positioning yields sufficient data for pricing.
    - May need to engage an external valuation agent to define approaches and required input data; methodologies should be validated and operationalized within CBS.
  - Implement integrated pricing hubs to value each eligible asset:
    - Input data collection module: (i) observable asset prices and market yields; (ii) asset static data (maturities, rates, coupons); (iii) list of eligible assets; (iv) market indexes including rates in money and foreign exchange markets.
    - Valuation module: predetermined and validated pricing methodology for each asset; mark-to-market value computed to ensure central bank’s market neutrality; use market prices or reliable appraisals when available, otherwise theoretical valuations.

### Risk mitigation measures
- Categories of risk mitigation:
  - Haircuts: calibrated to mitigate liquidity, market, credit, and other risks.
  - Margining provisions: allow additional collateral requests if collateral value falls during loan period. Other things equal, haircuts should be lower with margining in place.
  - Concentration limits: limit exposure to a certain asset class and diversify collateral pools.
  - Overcollateralization: requires additional collateral where increased risk of counterparty default exists (e.g., ELA).
- Haircut calibration objectives:
  - Protect CBS’s balance sheet while achieving risk equivalence across asset classes—i.e., haircuts calibrated so expected losses are the same for all collateral types given central bank’s risk appetite.
  - Haircut model components should include:
    - Liquidity risk: time-to-liquidation and expected time collateral can be liquidated at reasonable discount; depends on size of central bank position relative to market absorptive capacities.
    - Market risk: model price volatility over time-to-liquidation (interest-rate volatility models for marketable securities).
    - Credit risk: account for default of ultimate debtor during time-to-liquidation and related expected losses/shortfalls.
    - Additional risks: exchange rate risk for FX-denominated collateral; valuation risk for pricing-model uncertainty for illiquid collateral; residual maturity risk; mobilization risk (legal risk for assets held abroad, e.g., FX deposits).
- Current CBS haircut assessment and recommendations:
  - Existing haircut schemes appear lower than those used by other central banks; mission recommends a comprehensive review.
  - Current calibration is risk based but primarily captures market risk via Conditional Value-at-Risk (CVaR); time-to-liquidation risk not incorporated.
  - Given Seychelles’s BB+ sovereign credit rating, credit risk could be explicitly modeled.
  - Haircuts increase with bond maturity, but maturity add-on is relatively modest and should be reassessed for alignment with international practices.
- Tail risk and model recommendations:
  - Recommend Value at Risk (VaR) combined with duration approximation and stressed bond yield volatility (DASV) as a tail risk measure.
    - VaR: maximum loss at a given confidence level and generally easier to understand and validate.
    - Stressed bond yield change inputs: risk-free rate volatility, spread volatility, time-to-liquidation, and a multiplier for converting volatility to VaR (see formula (1), Annex VI).
    - Approach is typically conservative; central banks commonly set duration buckets and assign a duration number equal to the upper bound of each bucket for conservatism.
  - Risk-based haircut calibration of government bonds: adopt a Duration Approximation with Cross-country Regression (DACR) model (Annex VI).
    - DACR allows construction of hypothetical term spreads through cross-country comparisons given limited domestic data.
    - Model uses macroeconomic indicators such as debt-to-GDP ratio and real GDP growth to estimate term spreads; volatility of estimated spreads incorporated to calibrate haircuts for longer-maturity instruments (see formula (3), Annex VI).
- Mission application and calibration example:
  - Calibration used by mission:
    - Time-to-liquidation: assumed up to three months to liquidate government securities after hypothetical counterparty default (time-to-duration set to three months; time-to-liquidation set to one quarter to account for market shallowness).
    - Standard deviation: set to 240 basis points, based on volatility of average weekly-change in government bills yields between January 2020 and May 2025.
    - Term spread: set to zero (mission did not calibrate the term spread).
  - Model outputs: haircut schedules shown for different levels of central bank risk appetite 훼 (1−훼 being the haircut percentile).
    - Example: 훼=1% VaR implies a more conservative (tighter) haircut scheme.
    - In crisis, CBS might consider increasing its risk appetite (e.g., 훼=5%) to substitute traditional market players and ease monetary conditions; scenarios can be evaluated using the model (Figure 13).

*Source: IMF staff.*

### 90. Haircuts should be calibrated at a relatively low frequency—such as every two years, as

### 90. Haircuts should be calibrated at a relatively low frequency—such as every two years, as

### Haircut calibration and procyclicality
- Haircuts should be calibrated at a relatively low frequency—such as every two years, as currently envisioned in the CBS guidelines—to avoid introducing procyclical liquidity conditions.
- Calibrating haircuts during periods of low market volatility tends to produce lower haircuts, while heightened volatility leads to higher haircuts, even under a constant level of risk appetite (see formula (3), Annex VI).
- Frequent recalibration could unintentionally amplify liquidity cycles.
- Infrequent calibration supports better expectations management among counterparties regarding access to central bank liquidity.
- The CBS should adhere to a haircut revision calendar, conducting reviews only at pre-announced dates (e.g., one month in advance) or under exceptional circumstances (like a system-wide crisis).

### Haircut models for nonmarketable assets and aggregation of risk components
- During the hands-on session, the mission introduced CBS staff to haircut calibration models for nonmarketable assets, which are likely to be required for ELA operations.
- The presented model primarily captures credit risk and can serve as a short-term workaround.
- For a more granular approach, haircuts reflecting other risk dimensions can be:
  - Calibrated using standalone methodologies for each risk component.
  - Aggregated into a single figure using expert judgment and international comparisons to calibrate each risk component.
- Comparing standalone risks across asset classes will inform appropriate haircut levels and support risk equivalence.
- For market risk, haircuts can be determined by ranking assets according to their volatility, with higher haircuts applied to more volatile instruments; this approach can be extended to other risk categories in a consistent manner.

### Concentration limits and overcollateralization
- The CBS should assess methodologies for calibrating concentration limits and overcollateralization.
- Concentration limits:
  - Employed to manage exposure to specific asset classes—such as issuers, sectors, or asset types.
  - Help mitigate risk through collateral pool diversification.
- Overcollateralization:
  - Should protect the central bank’s balance sheet and address counterparty-specific risks in the context of ELA.
  - Could be used as a policy tool to incentivize compliance with ELA conditionality.
- Establishing clear methodologies for both concentration limits and overcollateralization would enhance the robustness of the CBS’s collateral framework.

### Example maturity add-ons and haircut schedule (government bond-derived)
- The maturity add-ons could be based on the haircuts differential across maturity buckets derived from government bond haircuts (example given: for loans, increase haircuts by 5 percent from maturity buckets 1-3 to 3-5 under a risk appetite of 1 percent).
- Duration range / Assigned duration / Haircut (95%-tile) / Haircut (98%-tile) / Haircut (99%-tile)
  - (0,0.5] / 0.5 / 1.2% / 1.5% / 1.7%
  - (0.5-1] / 1 / 2.3% / 2.9% / 3.3%
  - (1-3] / 3 / 6.9% / 8.5% / 9.6%
  - (3-5] / 5 / 11.2% / 13.7% / 15.4%
  - (5-7] / 7 / 15.3% / 18.7% / 20.9%
  - (7-10] / 10 / 21.1% / 25.6% / 28.5%
  - >10 / 20 / 37.7% / 44.6% / 48.8%

### Implementation timeline and follow-up technical assistance (TA)
- Implementation of the ELA framework will require several months of effort from multiple divisions and units within the CBS.
- The CBS demonstrated strong commitment through active participation in mission workshops and simulation exercises.
- Brief follow-up assistance may be contemplated to sign off on the framework before its endorsement by the CBS decision-making body.
- The mission offered:
  - Willingness to assist with questions during the process.
  - Desk-review of documents drafted by the CBS teams.
- Follow-up TA objectives:
  - Ensure the framework, including the collateral policy (specifically, haircut calibration for credit claims) and forward-looking solvency assessment, is developed in line with guidance provided.
  - Address any open issue or point of internal controversy before adoption.
  - TA from financial stability may be requested to develop the framework for a robust forward-looking solvency assessment, if needed.

### Annex I — CBS operational framework (selected points)
- Banks’ structural excess liquidity is driven by CBS Net Foreign Assets and their changes over time (Figure A1.1; figures in million SCR).
- Despite the CBS’s corridor system, the CBS fails to anchor short-term interbank rates toward the middle of the corridor; the indicative interbank rate (IBR) is a few percentage points above the SCF rate (Figure A1.2).
- There is de facto no interbank market; banks with excess reserves prefer accessing the SDF rather than lending short-term to other banks.
- Contributing factors:
  - Interbank borrowing is interpreted as evidence of financial strains leading lenders to apply penalty interest rates or withhold lending for competitive reasons.
  - Lending is uncollateralized or via pledges where the borrower retains asset ownership.
  - Two of the seven banks are branches of foreign banks with centralized liquidity management and limited operational autonomy.
  - Cost-efficiency considerations: developing and maintaining money market capacity entails fixed and running costs (trading platforms, credit lines, trained staff, trading desks); potential returns from money market transactions are not considered high enough to change the status quo.
- CBS instruments seldom used: repo/reverse repo, FX swaps, outright purchase/sale of securities, FX purchases/sales.
- Recent FX purchases (via auctions for predefined amounts) and overall increase in Net Foreign Assets (NFA) have been main drivers of the recent increase in excess liquidity.
  - Note: The mission understands that CBS NFA have also been bolstered by the government‘s increased borrowing in foreign currency; proceeds from foreign currency borrowing are sold to the CBS for SCR.

### Annex II — Public elements of ELA frameworks (key guidance)
- ELA frameworks should comprise public elements defining main rules and conditions (ELA regulation/guideline/policy) and be complemented by confidential internal ELA procedures (organizational/confidential aspects).
- I. GENERAL PROVISIONS
  - Definition: ELA is the provision by the central bank of short-term liquidity support as the last resort to a solvent, viable counterparty facing temporary liquidity needs, to preserve financial stability.
  - Counterparty eligibility: typically banks with current accounts at the central bank, subject to reserve requirements (where applicable), and supervised by the central bank or a supervisory agency; may be extended to NBFIs meeting operational and supervisory requirements.
- II. GENERAL CONDITIONS
  - Central bank discretion: ELA is discretionary and not an entitlement or facility.
  - ELA should only be provided as a last resort, to solvent and viable counterparties, for financial stability reasons.
  - ELA must always be collateralized and provided under conditionality.
  - Last resort: ELA may only be provided after exhaustion of all alternative sources of short-term funding; the counterparty should provide evidence it has exhausted alternatives.
  - Systemic risk assessment: central bank assesses risks to financial stability from rejecting an ELA request, including systemic character and contagion risk.
  - Solvency: central bank must be satisfied the counterparty is solvent; solvency assessment should be forward looking (typical definition: credible prospect to maintain or restore capital adequacy within, e.g., six months).
  - Viability: counterparty must be viable (sufficiently profitable over the long term and/or operate as a going concern without recurring recapitalizations).
  - Collateralization: ELA must be fully collateralized (as assessed by the central bank).
  - Conditionality: counterparty must present a credible action plan outlining remedial measures aimed at restoring a sound liquidity position [within X months].
- III. ELA PARAMETERS
  - Currency: central bank only provides ELA in domestic currency; may also provide, in exceptional circumstances, ELA in foreign currency.
  - Maturity:
    - Central bank approves an ELA envelope for up to two weeks [one month could be considered for central banks with limited technical capacity].
    - Within that envelope, ELA is provided on an overnight basis (maturity of one day, automatically renewed up to two weeks), volume adjusted daily (or weekly) according to counterparty’s liquidity needs.
    - The ELA envelope is recalibrated every two weeks and can be rolled over until fully repaid or the time limit for ELA (if any) is reached.

*IMF Technical Assistance Report*

### 12. Time Limit

### 12. Time Limit

### Time limit for ELA
- The time limit for ELA could be enforced by law or by central bank regulations.
- The time limit for ELA is X months, with the possibility of an extension for an additional X months, but only with reinforced safeguards (e.g., a government guarantee).
- Ultimate calibration of the time limit should be set according to the Law. Ideally, X should be six months, but this varies across countries, depending on whether the Law sets a time limit on ELA, and on the form of the time limit.
- The central bank could choose not to set a time limit in its regulations if the Law is silent.
- Operational enforcement: a time limit should be operationally enforced in the funding plan (see paragraph 31) to ensure timely repayment of the ELA by the counterparty.

### Brief discussion on an ELA time limit
- Rationale: balance flexibility to address severe liquidity crises (systemic liquidity crises or serious idiosyncratic liquidity stress affecting a systemic counterparty) against checks to avoid misuse of ELA.
- Pros: aligns incentives and reduces the risk of unlimited liquidity support burdening the central bank’s balance sheet.
- Cons: reduces central bank leeway in systemic crises.

### Volume
- The ELA envelope is calibrated by a forecast of the counterparty’s liquidity needs over the approved period (typically two weeks).
- The counterparty provides a forecast based on a template developed by the central bank, which is verified and adjusted as needed by the central bank.

### Interest Rate
- The ELA interest rate should be set at a spread above the marginal lending facility rate [or above the highest rate of instruments used to implement monetary policy].
- Objective: high enough to ensure ELA is a last resort and repaid promptly, while not jeopardizing counterparty solvency in prolonged need.
- Typical premium: 100–300 basis points over the marginal lending facility rate.
- The ELA interest rate should be below the penalty rate for violation of reserve requirements, where applicable.
- The ELA interest rate should be defined in the public ELA regulation/policy and should be uniform across counterparties.

### IV. COLLATERAL — Central Bank Discretion in Selection
- The central bank determines the minimum value of collateral and the assets to be mobilized by the counterparty receiving ELA.
- The counterparty must provide an up-to-date list of its unencumbered eligible assets for possible use as ELA collateral.
- Assets proposed as ELA collateral must be unencumbered and free of any liens.

### Eligible Assets
- The central bank can define a list of eligible asset classes; such a list supports preparedness and accountability.
- Eligible asset classes should include most or all transferable assets (unless explicitly prohibited by law), including but not limited to:
  - Securities (domestic and foreign, bonds, shares, asset-backed, etc.).
  - Credit claims.
  - Real estate and movable property subject to registration (and without any liens).
  - Gold and other precious metals.
  - [Foreign currencies.] (This varies across countries.)
  - [Movables that are not subject to registration can also be taken as collateral depending on their value, marketability, and provenance, such as paintings.]
- Alternative approach: consider all transferable and unencumbered assets—subject to additional legal requirements that may vary across jurisdiction—as mobilizable, provided appropriate risk control measures are applied.
- Possible/recommended exclusions: (i) nonperforming loans; (ii) loans to related parties; (iii) recently provided loans (even if they could be admitted with a 100 percent haircut).

### Conditions for Asset Use as ELA Collateral
- Assets must be:
  - The property of the counterparty requesting ELA.
  - Unencumbered, free of any liens, and preserved in procedures of forced execution.
  - Legally transferable/earmarked for the benefit of the central bank.
  - Denominated in local currency or major international currencies (not relevant for non-financial collateral, e.g., real estate).

### Conditions for Credit Claim Use as ELA Collateral
- Eligibility elements may vary by legal framework; some elements could be publicly disclosed.
- Conditions may relate to:
  - Credit claim categories (exclude irregular tenors such as overdraft credits, letters of credit, undrawn credit lines).
  - Prudential classification of the credit claim.
  - Currency of denomination.
  - Type of debtors and guarantors.
  - Absence of any encumbrance by another pledge and any dispute.
- Concentration limits on a single debtor/guarantor or economic sector could be mentioned publicly or kept confidential.

### Financial Collateral Arrangement and Identification
- Collateral establishment must be formalized through a legally binding collateral arrangement.
- To mobilize collateral, the requesting counterparty should share a list and identification elements of eligible assets with the central bank.
- Procedures for identifying mobilized collateral may vary by legal framework.

### Mobilization of Securities
- Securities collateral may be mobilized via:
  - Repurchase agreement between the counterparty (cash borrower) and the central bank (cash lender); or
  - Registration/pledge in relevant accounts coordinated with central securities depositories without transfer of ownership (pledge).
- Ideally both approaches should be available; legal restrictions may limit choice.
- Clarification: a repurchase agreement involves legal transfer of ownership to the lender; a pledge leaves ownership with the borrower on a blocked account.

### Mobilization of Collateral in the Form of Money
- Collateral as money (balances in current accounts, deposit accounts, other accounts at the central bank) is established by the central bank acquiring control over the account when the financial collateral arrangement is in force.
- Mobilization approach depends on legal framework; the requirement should ensure legal transfer of account ownership to the central bank in case of counterparty default.

### Mobilization of Credit Claims as Collateral
- Sequential steps:
  1. Provision by the counterparty of scanned copies of credit agreements, pledge agreements, and documents confirming collaterals.
  2. Notification by the central bank of the credit claims to be mobilized as collateral.
  3. Provision by the counterparty of the original credit agreements, pledge agreements, and documents confirming collaterals.
- Some contracts may require explicit consent from obligor(s) before mobilization; central bank should implement additional safeguards to maintain confidentiality during ELA operations.
- Steps may vary by jurisdiction and contract type; mobilization may require additional due diligence and legal checks.
- Possible additional aspects: notification by the counterparty of changes in credit claims mobilized as collateral; replacement of credit claims in the ELA collateral pool (both vary by legal framework).

### Adjustment of the ELA Collateral Pool
- At any time the central bank may require replacement of assets or additional eligible assets due to increased ELA need, change in risk profile, end of tenor, or application of risk management measures.

### Onsite and Offsite Inspections
- The central bank may conduct onsite and offsite inspections to verify accuracy and completeness of information provided by the counterparty, including assets used as collateral.

### Collateral Valuation
- Valuation rules depend on asset type and are defined by the central bank.
- Predefined rules (possibly internal procedures) may include:
  - Use market prices (if available).
  - Consider indicative quotes (e.g., Bloomberg or Refinitiv).
  - Rely on theoretical valuation based on market parameters (e.g., mathematical models for real estate and derivatives).
  - Consider nominal outstanding value (namely for credit claims).

### Risk Control Measures
- To protect the central bank from losses upon collateral liquidation, implement:
  - Haircuts on nominal or market value reflecting risks and time to liquidation.
  - Concentration limits to ensure diversification.
  - Margin calls to ensure continued sufficiency as asset values change.
- The value of the ELA collateral pool after application of those risk measures must always be at least 100 percent of the value of the ELA (including accrued interest) provided by the central bank.
- Central bank may adjust risk control measures and require reinforcement, replacement, and/or overcollateralization when justified.

### Regular Reporting of Assets Eligible as ELA Collateral
- At least annually, the central bank may request all ELA-eligible counterparties submit data on assets meeting eligibility criteria, in a specified format.
- Data should include credit quality details such as internal and external ratings, delinquency history, and, where available, probability of default and loss given default.

### V. CONDITIONALITY — ELA Agreement
- ELA provision is subject to signature of an ELA agreement defining terms, conditions, and obligations.
- The agreement should define additional reporting requirements and corrective measures.
- In some jurisdictions, separate counterparty and collateral agreements may be needed; in others, a single ELA agreement including collateral may suffice.
- Central banks could develop and share an ELA agreement template during calm times to increase readiness; templates can be quickly adjusted upon activation.

### Corrective Measures
- Provision and renewal of ELA conditioned on counterparty’s compliance with a program of measures agreed with the central bank, which may include (but are not limited to):
  - Suspension of dividends distribution and share buybacks.
  - Suspension of salary increases and bonuses for management.
  - Suspension or prior approval procedure for new large investments.
  - Measures to limit the provision of new loans (limits, prior notification, or prior approval).
  - Sale of noncore assets.
  - Measures to stabilize deposits and restore market access.
  - Measures to strengthen capital adequacy (e.g., recapitalization).
  - Obligation to conduct asset quality reviews and external audits at the request of the central bank, at the counterparties’ own cost, and to share results with the central bank.

### Funding Plan
- The counterparty receiving ELA must, within a maximum period of two weeks after initial provision, provide a detailed funding plan, updated [monthly/quarterly] during ELA.
- The funding plan must follow the template and procedures defined by the central bank and reflect the corrective measures in paragraph 30.
- The funding plan reflects measures planned to restore liquidity and is presented by management to the central bank; the central bank assesses adequacy and may require adjustments.
- Central banks could share a funding plan template in calm times to increase preparedness.

### Liquidity Monitoring
- A counterparty under ELA should be required to report its liquidity position, including details on inflows and outflows, to the central bank daily.

### VI. PROCESS AND GOVERNANCE — Request for ELA
- Requests must be submitted in writing using the central bank’s prescribed form, addressed to the Governor and copied to the Deputy Governor/Director General for Market Operations (or equivalent) and the division responsible for ELA.

### Required Information Supporting the ELA Request
- The request should include an estimation of ELA needs for the next two weeks (based on the funding plan template) and a comprehensive, up-to-date table of assets available as ELA collateral (based on the reporting template).

### Decision-Making Process
- The central bank’s board [alternatively, an executive board/committee of the central bank] decides to accept or reject the ELA request based on a technical assessment prepared by central bank staff.
- Decision-making should be collegial (consensus or majority) and ensure speed, confidentiality, efficiency, and the central role of the Governor.

### Notification of the Decision
- The central bank shall notify the requesting counterparty of approval or rejection.

### Extension and Recalibration of ELA
- If ELA continues to be required, the counterparty must submit a new request at least three working days before expiration of the current ELA envelope, supported by an estimate of ELA needs based on the central bank’s liquidity forecast template.

### VII. GOVERNMENT GUARANTEES
- ELA may only be provided under a government guarantee, provided in writing, in case of:
  - (i) concerns about the counterparty’s solvency;
  - (ii) concerns about the counterparty’s collateral; or
  - (iii) concerns about the exit from an ongoing resolution.
- Government guarantees: used where necessary to preserve financial stability (complement to, not substitute for, collateral and credible action to restore solvency). All three cases require case-by-case assessment by the central bank and agreement by the government.

### Coordination with the Treasury Function
- At initiation of an ELA operation, central bank should coordinate with the government’s Treasury function, particularly when:
  - (i) the operation may require a government guarantee; and/or
  - (ii) the counterparty requesting ELA is systemic.
- Establish an MoU with the Treasury defining information exchanges, safeguards, and conditions requiring a government guarantee.
- Central bank should operationalize strict safeguards (strict solvency/viability assessment, strict collateralization with conservative haircuts, strict conditionality) to mitigate fiscal risks and reassure the Treasury.
- Central bank decisional and operational independence should be guaranteed.
- When a government guarantee is needed, information exchanges should provide clarity on solvency, viability, collateral, and compliance for an informed Treasury decision.

*IMF Technical Assistance Report | 48–57*

### 40. Repayment of ELA and Release of Collateral

### 40. Repayment of ELA and Release of Collateral

### Repayment and pledge relief
- The counterparty repays the principal amount of ELA and the accrued interests upon maturity of the ELA loan, or before maturity in the case of prepayment.
- The pledge relief of the collateral is subject to the full repayment of ELA, including accrued interests and any applicable penalties.

### Discontinuation of ELA
- The central bank may, at any time, discontinue the provision of ELA and require its immediate repayment by the counterparty if it determines that the conditions for ELA are no longer met.

### Collateral enforcement
- If the counterparty fails to repay the ELA (including accrued interests and any applicable penalties) upon maturity of the ELA or when repayment is demanded by the central bank, the central bank shall enforce the collateral to recover its outstanding ELA exposure.
- The central bank should exercise care in liquidating the collateral to preserve its reasonable value in order to avoid potential legal challenges.

### Relevant operational parameters from the ELA building blocks
- ELA described as lender-of-last-resort support for solvent and viable banks facing temporary liquidity stress; collateralized loans and repos preferred.
- Eligible counterparties: only banks (no access to nonbank financial institutions at this stage).
- Solvency: forward-looking definition; a bank is deemed solvent if it has a credible prospect to maintain or restore appropriate capital adequacy ratios in the near term. Explicit definition components: (i) “appropriate capital adequacy ratios” = above the prudential minima; (ii) “in the near term” = in the next 3/6 months.
- Viability: business model sustainability; profitability sufficient to avoid repeated recapitalizations.
- Financial stability perspective: consider systemic nature and contagion risks when deciding on ELA.
- Price: establish a minimum price, which should be between 100 and 300 basis points above the highest monetary policy lending facility rate.
- Maturity: define the maximum maturity: 2 weeks.
  - At maturity, the central bank reassesses need for further ELA and recalibrates the ELA envelope based on a short-term forecast on the bank’s liquidity needs.
  - Timeline for ELA loans rollover/recalibration: the ELA proposal (with revised ELA envelope) should be submitted to the Board of Directors, at the latest, 2 working days before its meeting.
- Time limit: ELA should be given for a maximum duration of, for instance, 180 days, renewable once for another 180 days (must align with statute/act).
  - Up-to-date funding plans should be submitted and analyzed every 1 or 3 months.
- Collateral rules:
  - ELA must be collateralized based on the central bank’s instructions.
  - The bank requesting ELA must provide a detailed, up-to-date list of its unencumbered assets. The central bank decides which assets will be mobilized as ELA collateral and instructs the bank accordingly.
  - The central bank applies appropriate risk control measures, including haircuts, overcollateralization, and concentration limits (details confidential).
  - Risk control framework items: (i) haircut schedule and haircut add-ons by asset class; (ii) concentration limits (e.g., by issuer/debtor, by sector); (iii) significant haircut add-on (e.g., 50%) for loans to related parties; (iv) overcollateralization (may vary across counterparties).
- Conditionality: beneficiary bank must sign a legally binding ELA agreement engaging the bank’s highest authorities.
  - Common conditionality in the ELA agreement:
    i. More detailed and frequent reports to be submitted to the central bank  
    ii. Report of the detailed list of assets (including encumbrance status), at the central bank’s request  
    iii. Suspension of dividends as long as ELA is provided; possible restrictions (e.g., on significant new loans and investments)  
    iv. Submission of a funding and capital plan  
    v. Daily report of the liquidity situation
  - Additional master agreement conditionality (examples): asset quality reviews (at bank cost), prohibition of loans to related parties, enhanced reporting, prior communication on asset sales, freeze on salaries (in particular for management), enhanced obligations on anti-money laundering.
- Funding plan: bank under ELA required to submit a credible funding plan; templates and assessment guidelines annexed.
- Decision making: decision to provide ELA made by central bank board or executive committee based on technical assessment prepared by staff.
- Liquidity monitoring: banks under ELA required to report liquidity position including inflows and outflows daily; methodology to calibrate ELA envelope based on 2-week liquidity forecast.
- Internal organization and deliverables:
  - ELA team composition: Banking Supervision, (Financial Stability), Monetary Policy and Credit (including Risk Management), Legal; coordinated by Monetary Policy and Credit.
  - Deadlines: Banking Supervision to provide solvency and viability assessment within 24 hours (ideally less); Legal and Banking Supervision to provide proposed ELA agreement within 24 hours (ideally less); Monetary Policy and Credit to calibrate ELA envelope and give mobilization instructions within 24 hours (ideally less).
- Communication: define conditions for communication on ELA during operations (exceptional and limited) versus ex-post communication.
- Government role: in case of (i) ELA longer than 180 days; (ii) doubt about the bank’s solvency; (iii) concern over appropriate collateralization of ELA; or (iv) ongoing resolution process, the central bank will only consider providing ELA with a sufficient government guarantee.
  - Define an MoU between central bank and Ministry of Finance covering information exchange and conditions for ELA with government guarantee.

### Collateral acceptance ordering and scores (selected items and exact scores)
- Table A5.2. Collateral Eligibility and Preference — Collateral Score (selected entries):
  - DAA: 16
  - Government securities: 18
  - Domestic FX deposits: 19
  - FX deposits abroad: 24
  - Government stocks: 24
  - Overdrafts: 25
  - Term loans: 27
  - FX overdrafts: 28
  - Loans and advances: 28
  - FX bonds: 30
  - FX loans: 30.5
  - Mortgages: 32
  - FX mortgages: 33.5
  - Intangible assets: 40
  - Financial lease: 43
  - Fixed assets: 43

### DACR model for setting haircuts on government bonds (high-level mechanics and exact formulas)
- Model name: Duration Approximation with Cross-country Regression (DACR). Two components: the duration-based approximation and the cross-country regression model.
- Duration-based approximation formula for haircut:
  - ha = T Δy_{α,T}
- Duration definition (exact expression):
  - T = −(1/P) (dP/dy)
- Stressed bond yield change computed using VaR or ES variants:
  - VaR: Δy_{α,T} = Φ^{-1}(α) ⋅ (σ_I^{α} + σ_S^{α}) ⋅ √Δt
  - ES: Δy_{α,T} = [φ(Φ^{-1}(α)) / (1−α)] ⋅ (σ_I^{α} + σ_S^{α}) ⋅ √Δt
- Inputs for stressed bond yield change: (i) risk-free rate volatility σ_I^{α}; (ii) spread volatility σ_S^{α}; (iii) time to liquidation Δt; (iv) multiplier for converting volatility to VaR or ES (Φ^{-1}(⋅), φ(⋅)).
  - Time to liquidation used in empirical application: Δt = 10 business days for liquid collateral and Δt = 20 business days (=one month) for illiquid collateral, following Basel III regulation (Δt=10 표 or 20).
- Notes on distributional assumptions:
  - Normal distribution employed for analytical tractability; multipliers for VaR and ES computed under normality.
  - Duration-based approximation is conservative because convexity (second derivative) is typically positive; incorporating convexity would lead to a less conservative haircut estimate.

*Source: IMF staff (tarea2026020-source-pdf - 40. Repayment of ELA and Release of Collateral).*

### 10. It is a common practice among central banks (CBs) to set duration buckets by

### 10. It is a common practice among central banks (CBs) to set duration buckets by

### Duration buckets: operational efficiency vs. accuracy
- Central banks balance two key criteria when setting duration buckets: operational efficiency and accuracy.
- For operational efficiency, less granular buckets are preferred because this simplifies management.
- For accuracy, more granular buckets are preferred to more precisely match the risk of potential losses.
- In terms of conservativeness, assigning a duration number equal to the upper bound of each duration bucket is better. Example: for the maturity bucket from one year to two years, assigning two years as the duration for this maturity bucket is more conservative than assigning one year.

### Cross-country regression model to construct hypothetical sovereign spreads
- Purpose: to construct hypothetical sovereign spreads for countries lacking sovereign credit ratings or secondary sovereign bond markets.
- Method: formulate a cross-country regression where sovereign spreads is a linear function of macro variables; estimate coefficients using data-available countries; use estimated model and available macroeconomic variables to construct sovereign spreads for data-scarce countries.
- Note: comparable regression could be computed for the term spread to calibrate haircuts for government bonds of longer maturities.

### Model specifications and key macro variables
- Two specifications considered:
  - Specification 1 (Equation (5)): only debt-to-GDP ratio and real GDP growth are regressors.
  - Specification 2 (Equation (6)): includes control variables in addition to debt-to-GDP and real GDP growth.
- Notation: 퐷푒푏푡_{푖,푡}, 퐺퐷푃_{푖,푡}, and 푍_{푖,푡} are the debt-to-GDP ratio, the real GDP growth, and a vector of control variables for the 푖-th country, respectively.
- Control variable vector: 푍_{푖,푡} = (푇푟푎𝑑𝑒_{푖,푡}, 푃𝑒𝑟𝐺𝐷𝑃_{푖,푡}, 𝐹𝑋_{푖,푡}, 𝜋_{푖,푡})′ (trade openness, GDP per capita, FX depreciation, and CPI inflation).
- Economic intuition: higher debt-to-GDP ratio and more negative real GDP growth are associated with larger sovereign spreads (훽_{퐷푒푏푡,푡} > 0 and 훽_{퐺퐷푃,푡} < 0).

- Equations:
  - (5) 푆푝푟푒푎푑_{푖,푡} = 훼_{푖,푡} + 훽_{퐷푒푏푡,푡} 퐷푒푏푡_{푖,푡} + 훽_{퐺퐷푃,푡} 퐺퐷푃_{푖,푡} + 휖_{푖,푡}
  - (6) 푆푝푟푒푎푑_{푖,푡} = 훼_{푖,푡} + 훽_{퐷푒푏푡,푡} 퐷푒푏푡_{푖,푡} + 훽_{퐺퐷푃,푡} 퐺퐷푃_{푖,푡} + 훽_{𝑧} 𝑍_{푖,푡} + 휖_{푖,푡}

### Stabilizing parameter estimates: five-year averaging
- To ensure stability of key parameters, five-year averages of the coefficients are used as inputs to the haircut model.
- Five-year averaging helps avoid instability and provides a more reliable basis while allowing reflection of the most recent global macroeconomic environment.

### Adjustments for parameter uncertainty and model risk
- The cross-country model may be misspecified; parameter estimates could be inaccurate due to insufficient number of countries or time length in the data.
- An adjustment for parameter uncertainty is applied to make the model robust against model risk; this adjustment increases spread volatility conservatively.
- Mechanism: adjust key coefficients using their five-year averages and standard deviations obtained from the cross-country regression outputs.
  - 훽_{퐷푒푏푡̅} and 훽_{퐺퐷푃̅} are the five-year averages of the coefficients on debt-to-GDP and real GDP growth.
  - 휎_{퐷푒푏푡} and 휎_{퐺퐷푃} are the standard deviations of those coefficients.
  - 휃 is the risk tolerance for parameter uncertainty; coefficients on control variables could be adjusted similarly.
- Adjustment formulas:
  - (7) 훽_{퐷푒푏푡_{ᴀᴅᴊ}} = 훽_{퐷푒푏푡̅} + 훷^{-1}( 휃 ) ⋅ 휎_{퐷푒푏푡}
  - (8) 훽_{퐺퐷푃_{ᴀᴅᴊ}} = 훽_{퐺퐷푃̅} − 훷^{-1}( 휃 ) ⋅ 휎_{퐺퐷푃}

- Example interpretation of 휃 (from footnote):
  - If 휃 is assumed to be 휃 = 1 − 1 1+푁 where 푁 means the model is updated once in 푁 years, then annual revaluation (푁 = 1) leads to 휃 = 0.5.
  - If the frequency is 4 years (푁 = 4), then 휃 = 1 − 1/(1+4) = 0.8.
- Guidance: the risk tolerance for parameter uncertainty adjustment needs to be higher if the model is less frequently re-evaluated.

### Producing model-based sovereign spreads and spread volatility
- Once specification is established (e.g., Equation (5)), and with 훼̅ as the five-year average intercept and adjusted coefficients 훽_{퐷푒푏푡_{ᴀᴅᴊ}} and 훽_{퐺퐷푃_{ᴀᴅᴊ}}, inputting the time series of debt-to-GDP and real GDP growth for a data-scarce country produces model-based sovereign spreads.
  - (9) 𝑆𝑝𝑟𝑒𝑎𝑑_{𝑆𝑒𝑦𝑐ℎ𝑒𝑙𝑙𝑒𝑠,𝑡} = 훼̅ + 훽_{퐷푒푏푡_{ᴀᴅᴊ}} 퐷푒푏푡_{𝑆𝑒𝑦𝑐ℎ𝑒𝑙𝑙𝑒𝑠,𝑡} + 훽_{퐺퐷푃_{ᴀᴅᴊ}} 퐺퐷푃_{𝑆𝑒𝑦𝑐ℎ𝑒𝑙𝑙𝑒𝑠,𝑡}

- Model-based spreads should be assessed and compared with other relevant indicators where available; users must review reasonableness given country macroeconomic knowledge.
- Five-year volatility of spread changes is computed as a key input for the haircut model:
  - Compute standard deviation of spread changes over the past five years using the model-based spreads.
  - The intercept 훼̅ does not impact computation of spread volatility and is often highly sensitive to model specification.
  - Volatility is computed from five-year model-based sovereign spreads to balance stability and recent macroeconomic reflection.

### Key parameters for the authority to decide
- (i) VaR percentile for the spread shock
- (ii) VaR percentile for parameter uncertainty
- (iii) spread volatility calculated as the five-year standard deviation of model-based sovereign spreads
- (iv) risk-free interest rate volatility based on the time series of the actual policy rate set by the authority or short-term rate in Seychelles
- (v) the time to liquidation
- The duration bucket can also be set by the authority for operational efficiency.

*IMF Technical Assistance Report | 69*

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_Source: https://www.imf.org/-/media/files/publications/tar/2026/english/tarea2026020-source-pdf.pdf_