Liquidity Coverage Ratio Basel 111

Liquidity Coverage Ratio- the objective is to ensure that a bank maintains an of high-quality liquid assets that can be converted into cash to meet its liquidity needs for a one month horizon.

= (Stock of HQLA / Total net cash outflows over the next 30 calendar days) ≥ 100%

Net cash outflows Total expected cash outflows –Min {total expected cash inflows; 75% of total expected cash outflows}.

The LCR has two components:

(a) Value of the stock of HQLA in stressed conditions; and

(b)Total net cash outflows, calculated according to the scenario parameters outlined below.

Ø High-Quality Liquid Assets- HQLA are calculated as-

·        Market value multiplied by asset factor for individual levels,

·        Cash, central bank reserves, marketable securities issued or guaranteed by sovereigns, central banks and domestic sovereign debt assigned a factor of 100%.

Characteristics-

·        Fundamental characteristics– low market and credit risk, ease and certainty of valuation, listing on a developed exchange

·        Market characteristics– active and sizeable market, ‘safe-haven’ assets, eligible for repurchase agreements with central banks.

·        Operational requirements– unencumbered and freely available

Summarized overview of assets categories:

·        Level 1 asset: cash, central bank reserves, qualifying government bonds (0% standardized risk-weight under Basel II), etc.

·        Level 2A assets: government bonds (20% standardized risk-weight under Basel II), qualifying corporate bonds and covered bonds with credit rating AA- and above. A 15% haircut is applied to the current market value of each Level 2A asset held in the stock of HQLA

·        Level 2B assets: qualifying RMBS (credit rating AA and above) and corporate bonds (credit rating between A+ and BBB-), qualifying common equity shares. subject to a 25% haircut

Ø  Total net cash outflows over the next 30 calendar days =

Total expected cash outflows –Min {total expected cash inflows; 75% of total expected cash outflows}.

·        Cash outflows-

1.   Retail deposit run-off- R include demand deposits and term deposits. These retail deposits are divided into “stable” and “less stable” portions of funds. With minimum run-off rates listed for each category.

A)  Stable deposits (runoff rate = 3% and higher)- deposit withdrawal highly unlikely, the deposits are in transactional accounts (e.g. salary account).

B)  Less stable deposits (run-off rates = 10% and higher)-

2.   Unsecured wholesale funding run off- liabilities and general obligations of legal entities, including sole proprietorships and partnerships).

3.   Secured funding run-off- secured funding” is defined as those liabilities and general obligations that are collateralized by legal rights to specifically designated assets owned by the borrowing institution in the case of bankruptcy, insolvency, liquidation or resolution.

Backed by Level 1 assets or with central banks – amount added to cash outflow 0%, Backed by Level 2A Assets 15% and Backed by Level 2B assets 25%.

4.   Derivatives cash flow receives 100% factor- calculated on a net basis (i.e. inflows can offset outflows) by counterparty, only where a valid master netting agreement exists. Options should be assumed to be exercised when they are ‘in the money’ to the option buyer)

·        Cash inflows- Bank should only include contractual inflows (including interest payments) from outstanding exposures that are fully performing and for which the bank has no reason to expect a default within the 30-day time horizon. Contingent inflows (possible asset that will be confirmed by uncertain future events) are not included in total net cash inflows.

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1-   Secured lending, including reverse repos and securities borrowing-  A bank should assume that maturing reverse repurchase or securities borrowing agreements secured by Level 1 assets will be rolled-over and will not give rise to any cash inflows (0%).

2-   Retail and small business customer inflows- This scenario assumes that banks will receive all payments(including interest payments and installments) from retail and small business customers that are fully performing and contractually due within a 30-day horizon. At the same time, however, banks are assumed to continue to extend loans to retail and small business customers, at a rate of 50% of contractual inflows. This results in a net inflow number of 50% of the contractual amount.

3-   Other wholesale inflows- 100% for financial institution and central bank counterparties; and 50% for non financial wholesale counterparties

4-   Derivatives cash inflows: the sum of all net cash inflows should receive a 100% inflow factor. 

http://www.bis.org/publ/bcbs238.pdf

 

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