This document discusses asset and liability management (ALM), liquidity risk management, and Basel III regulations. It provides an overview of the purpose of ALM in balancing risks, the importance of liquidity, and how liquidity risk can arise from a bank's assets and liabilities. It then summarizes the Basel III liquidity standards, including the Liquidity Coverage Ratio (LCR) which requires banks to hold sufficient high-quality liquid assets to cover net cash outflows over 30 days during a stress period, and the Net Stable Funding Ratio (NSFR) which aims to ensure banks have sufficient long-term funding. The document outlines the requirements for high-quality liquid assets and the methodology for calculating net

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ALM & Basle III Webinar
Senthil Gomathinayagam

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Contents
• ALM – role & purpose
• Liquidity Risk – importance & management
• Basel III
• Q&A

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Purpose of ALM / Treasury
ALM / Treasury have 3 main roles:
Service Provider:
Liquidity Provider:
Investment Manager

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Asset & liability management
ALM is a balancing act between various risks:
• Liquidity Risk
• Interest Rate Risk
• Credit Risk
• Operational Risk
• Solvency Risk
• Currency Risk

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ALM
ALM is Strategic & Goal of ALM is:
To ensure that shareholders value and net interest income are optimised and remain stable & positive under all
possible interest rate scenarios

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LIQUIDITY RISK
• Liquidity risk : potential loss due to the bank’s inability to meet its cash-flow obligations as they fall due at
reasonable cost
– Repay deposits
– Provide committed funds
– payments on off-balance sheet instruments, interest, etc.
“Liquidity is like oxygen;
you only feel it when it is not there”

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HOW DOES LIQUIDITY RISK RISE?
• Example: 3 Year Asset funded out of 3 month Deposit
Liquidity Risk: After 3 months, the liability may not be rolled over
Deposit

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Why is LIQUIDITY important?
Insufficient liquidity can lead to:
• Failure to repay deposits on demand
• A run on the bank
• Heavy losses
• Insolvency
Excess liquidity can lead to:
• Missing profitable opportunities
• Inefficient use of capital
• Risk of takeover

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Principles of Liquidity Risk Management
• Clear articulation of liquidity risk tolerance & senior management review
• Incorporation of liquidity cost and risk in product pricing and performance measurement.
• Diversification of sources and tenor of funding
• Effective Intraday liquidity and collateral management
• Stress testing, contingency funding plan and maintenance of liquid assets / securities
• Identification, measurement, monitoring and controlling of liquidity risk
• Understanding interaction between liquidity & other risks

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Types of LIQUIDITY RISK
• Funding Risk
• Trading Risk

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Objectives of BASEL III
• To strengthen global capital and liquidity regulations with the goal of promoting a more resilient banking sector
• To improve the banking sector’s ability to absorb shocks arising from financial and economic stress.
• Basel 3 introduces major changes in capital regulations, new liquidity standards and addresses systemic risk

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Key Metrics
Basel 3 Liquidity Standard Objective Timeline
Liquidity Coverage Ratio (LCR) =
 Measures short-term liquidity risk
 Ensure a bank has sufficient liquid assets to survive a short-term
(30 days) stress scenario
 Ensure a bank has sufficient liquid assets to survive a short-term
(30 days) stress scenario
Observation period from 1 Jan
2011
Stagnated Implementation, 60%
compliant on 1 Jan 2015 and
100% compliant by 2018
Net Stable Funding Ratio (NSFR) =
 Measures medium to long-term liquidity risk
 Establishes minimum acceptable amount of stable funding based
on the liquidity characteristics of the assets
 To ensure that a bank’s behavioural long term assets are funded
with a minimum amount of behavioural long-term liabilities
 Amount of equity & liability financing expected to be reliable
sources of funds over 1-yr
Provides a clear view for investors & customers on:
 Decline in profitability or solvency
 Reputation or credit quality of the bank
Observation period from 1 Jan
2011
Implementation in
1 Jan 2018
%100
days-30overflowCashNet
AssetsLiquidQualityHighofStock
LCR
%100
FundingStableofAmountRequired
FundingStableofAmountAvailable
NSFR

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LCR Requirements
• Banks must hold a stock of unencumbered HQLA to cover the total net cash outflows over a 30-day period under the
prescribed stress scenario
• A bank should periodically monetise a proportion of the assets in its liquid assets buffer through repo or outright sale
to the market in order to:
• LCR is to be reported in a common currency
• Banks are expected to be able to meet their liquidity needs in each currency and maintain high quality liquid assets
consistent with the distribution of their liquidity needs by currency

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Stress Scenario
The scenario is a combined idiosyncratic & market-wide shock that would result in:
– Run-off of a proportion of retail deposits
– Loss of unsecured wholesale funding capacity
– Loss of secured short-term financing with certain collateral and counterparties
– 3-notch bank downgrade resulting in additional contractual outflows
– Increases in market volatility that impact the quality of collateral / future exposure of derivative positions.
– Unscheduled draw down on committed but unused credit and liquidity facilities
– Mitigate reputational risk by buying back bank debt to honour non-contractual obligations

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Denominator: HQLA
Level 1
Asset
• The highest quality and the most liquid asset and there is no limit on holding these assets for LCR
• Cash
• Central bank reserves
• Marketable securities backed by sovereigns and central banks
• Level 1 assets may not in aggregate account for <40% of a HQLA
• Level 1 HQLA: assessed using international ratings
Level 2
Asset
• Comprised of Level 2A and Level 2B assets:
• Level 2A assets includes government securities, covered bonds and corporate debt securities (at least AA- rating)
• Level 2B assets includes lower rated:
• Corporate Bonds (rated A+ to BBB-)
• Residential Mortgage Backed Securities (rated higher than AA)
• Common Equity (50% haircut)
• Level 2 assets may not in aggregate account for >40% of a HQLA
• Level 2B assets may not account for >15% of a bank’s total stock of HQLA
• Level 2 HQLA: assessed by External Credit Assessment Institution specified by the local regulator based on Basel II standardised approach for Credit Risk

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Numerator: Net 30-day Cash-Flow
Cash Outflows
•Retail deposit run-off
•Unsecured wholesale funding run-off
•Secured funding run-off
•Other liabilities due during next 30 days
•Collateral other than “Level 1” assets
•Credit & liquidity facilities
•Total Cash Outflows over next 30 days
Cash Inflows
•Secured lending including reverse repo & borrowing against securities
•Other inflows by non-financial customer / counterparty
•Undrawn credit & liquidity facilities
•Specified Payables & Receivables expected over next 30-days
•Liquid Assets
•New issuance of obligations
•Total Cash Inflows over next 30 days
•Net Cash Outflows over next 30 days
•Liquidity Coverage Ratio (LCR %)
Net Cash-Flow under stress for next 30 calendar days =
Cumulative Expected Cash Outflows – Cumulative Expected Cash Inflows
LCR to be reported MONTHLY
LCR to be disclosed as part of Basel Pillar 3 Disclosure

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Net Stable Funding Ratio
Available Stable Funding
• Tier 1 & 2 Capital
• Preferred stock of liquidity (not inc. in Tier 2) >= 1-yr
• Liabilities (secured & unsecured borrowing) with effective maturities >= 1-yr
• Non-maturity deposits and term deposits with maturities <= 1-yr expected to stay
with the bank for extended period in a idiosyncratic stress event
• Unsecured wholesale funding with maturities <1-yr that is expected to stay with the
bank
Required Stable Funding
• Cash
• Short-term unsecured instruments & transactions with maturity <=1-yr
• Securities with no embedded option with maturity <= 1-yr
• Securities held with an off-setting Reverse Repo
• Loan to banks with maturity <=1-yr, that are not renewable & lender has the Right to
Call
• Liquid assets with maturity >= 1-yr
• Corporate bonds / Covered bonds rated higher than AA- with maturity >= 1-yr
• Gold
• Equity not issued by FI
• Corporate bond / covered bond that are Central Bank eligible
• RMBS
• Loans to non-FIs with maturity >= 1-yr
• Loans to retail customers & SME with maturity <= 1-yr

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