Basel III Liquidity Risk Measurement, Standards and

Monitoring
• The application of the requirements follow the scope set out in Basel II
• LCR should be reported monthly, with the ability to increase frequency to
weekly or daily in stressed situations, and NSFR should be reported at least
quarterly.
Liquidity Coverage Ratio
• Ensure that a bank has enough unencumbered, high-quality liquid assets that
can be converted into cash to meet its liquidity needs for a 30 day time
horizon under severe liquidity stress
o Stock of high quality liquid assets/Total net cash outflows over the next
30 calendar days ≥ 100%
• The scenario entails:
o Run off of a proportion of retail deposits
o Partial loss of unsecured wholesale funding capacity
o Partial loss of secured, short-term financing
o Additional contractual outflows that would arise from a downgrade of
up to 3 notches of the banks public credit rating
o Increases in market volatilities that impact the quality of collateral or
potential future exposure of derivative positions
o Unscheduled draws on committed but unused credit and liquidity
facilities that the banks has provided to clients
o Potential need for the bank to buy back debt or honor non-contractual
obligations
• High quality liquid assets
o Fundamental Characteristics
 Low credit and market risk
 Ease and certainty of valuation
 Low correlation with risky assets
 Listed on a developed and recognized exchange market
o Market Related Characteristics
 Active and sizeable market
 Presence of committed market makers
 Low market concentration
 Flight to quality
o Level 1 Assets (no limits)
 Cash
 Central bank reserves
 Marketable securities
• Assigned 0% risk weight
• Traded in large, deep and active cash markets
• Proven record as liquid source
o Level 2 Assets (up to 40% of the stock)
 Marketable securities
• Assigned 20% risk weight
 Corporate and covered bonds
o For jurisdictions with insufficient liquid assets one may utilize:
  Contractual committed liquidity facilities from the relevant
central bank
 Foreign currency liquid assets
 Additional use of Level 2 assets with higher haircuts
• Total net cash outflows
o Outflows – Min {inflows: 75% of outflows}
• Cash Outflows
o Retail deposit run-off – Deposits placed with a bank by a natural person
 Stable deposits (run off rate of 5% or higher)
 Less stable deposits (run off rate of 10% of higher)
 Retail fixed term deposits – Deposits with a withdrawal notice of
30 days
o Unsecured wholesale funding run-off – Liabilities and obligations that
are raised from non-natural persons and aren’t collateral
 Funding from small business: 5%, 10% and higher – Same
bucket definitions as retail deposit run-off apply
 Funding with operational relationships: 25% run off rate given
 Deposits from networks of cooperative banks: 25% run off rate
given
 Funding by non financial corporate, sovereigns, central banks
and public sector entities: 75% run off
 Funding by other legal entities: 100% run off factor
o Secured funding run off – Liabilities that are collateralized
 In the case of a loss on short term transactions, subsequent
transactions are limited to those backed by high-quality liquid
assets
o Other funds:
 Derivatives payable: 100% run off
 Contractual obligations to extend funds within 30 days – 100%
outflow rate
 All other obligations are subject to national run off rates (eg
letters of credit)
• Cash Inflows
o Amount of inflows that can offset outflows is capped at 75% of outflows
o Reverse repos and securities
 Level 1 assets – assumed to roll over: 0% inflow
 Level 2 assets: 15% inflow
o Lines of credit: 0% outflow
o Others
 Retail and small business inflows: 50% inflow
 Financial institution counterparties: 100% inflow
 Non-financial counterparties: 50% inflow
 Operational deposits: 0% inflow
 Derivatives receivable: 100% inflow
 All other inflow percentages should be determined appropriately
Net Stable Funding Ratio
 • Establish a minimum acceptable amount of stable funding based on the
liquidity of assets over a one year horizon to ensure that long terms assets
are funded with at least a minimum amount of stable liabilities
o Available amount of stable funding/Required amount of stable funding
> 100%
• Definition of available stable funding
o Capital
o Preferred stock with maturity of equal to or greater than one year
o Liabilities with effective maturities of one year or greater
o Portion of non-maturity deposits and/or term deposits with maturities
of less than one year
o Portion of wholesale funding with maturities of less than a year
• Ensure stable funding over one year in the case of:
o A significant decline in profitability or solvency arising from increased
risk
o A potential downgrade in a debt, counterparty credit or deposit rating
o A material event that calls into question reputation or credit quality
• Encumbered assets on the balance sheets receive a 100% RSF
• For assets and liabilities with a remaining maturity of less than one year, the
committee will gather data to allow analysis on buckets of both assets and
liabilities maturing within the one-year horizon to further consider the
treatment of these instruments in the NSFR.
Monitoring Tools
• Contractual Maturity Mismatch
o Identify the gaps between the contractual inflows and outflows of
liquidity for defined time bands.
 No rollover of existing liabilities is assumed to take place
 A bank should record all securities flows
o A bank should be able to indicate how it plans to bridge any identified
gaps in its internally generated maturity mismatches.
• Concentration of Funding
o Identify those sources of wholesale funding that are of such
significance that withdrawal of this funding could trigger liquidity
problems.
 Banks should monitor both the absolute percentage of the
funding exposure, as well as significant increases in
concentrations.
o Significant Counterparties or Instruments/Products
 Accounting for more than 1% of the bank’s total balance sheet.
o Significant currency
 Accounting for more than 5% or more of the bank’s total
liabilities.
o Should be reported for the time horizons of less than 1 month, 1-3
months, 3-6 months, 6-12 months and longer than 12 months.
• Available Unencumbered Assets
o Provides supervisors with data of banks’ available unencumbered
assets.
  Banks should report the amount, type and location of available
unencumbered assets
 In addition to providing the total amounts available, a bank
should report these items categorized by:
• Currency
• Estimated haircut that the secondary market and/or
relevant central bank would require
• Expected monetized value of the collateral
• Location of assets
• LCR by Significant Currency
o Monitor the LCR in significant currencies.
o Foreign Currency LCR = Stock of high-quality liquid assets in each
significant currency/Total net cash outflows over a 30-day period in
each significant currency.
o A currency is considered significant if it accounts for 5% or more of the
bank’s total liabilities.
o No internationally defined minimum required threshold so supervisors
could set minimum monitoring ratios for the foreign exchange LCR.
• Market-Related Monitoring Tools
o This data can be monitored at the following levels to focus on potential
liquidity difficulties:
 Market-wide information - Absolute level and direction of major
markets can be monitored including:
• Equity prices
• Debt markets
• Foreign exchange markets
• Commodities markets
• Indices related to specific products.
 Information on the financial sector – Market correlation
 Bank specific information – Lose of confidence or identified risks
in an institution