Basel 3 January 2013

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Basel 3 January 2013

  1. 1. 1Basel iii Compliance ProfessionalsAssociation (BiiiCPA)1200G Street NW Suite800Washington, DC 20005-6705USA Tel:202-449-9750Web: www.basel-iii-association.comDear Member,If you want onlythe presentationsof theCertified Basel iii Professional (CBiiiPro)program, you can have them at $97(insteadof $297, the cost of the full program). Tolearnmore:www.basel-ii-association.com/ Distance_Learning_Online_Certification_CBiiiPro_Presentations.htmWe had such an interestingmonth… and the most interestingdayswerejust after the first week of themonth, whenwecould read the amendedliquiditystandards…Basel III - Group of Governorsand Headsof Supervision endorsesrevised liquiditystandard for banks6January 2013TheGroup of Governorsand HeadsofSupervision(GHOS), the oversight bodyof theBasel Committeeon BankingSupervision, mettodayto consider the Basel CommitteesamendmentstotheLiquidityCoverageRatio(LCR) asa minimum standard.It unanimouslyendorsedthem.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  2. 2. 2Todays agreement isa clear commitment toensurethat banks holdsufficient liquid assetsto prevent central banksbecoming the"lender offirst resort".TheGHOSalsoendorseda new Charter for the Committee, anddiscussedthe Committeesmedium-term workagenda.TheGHOSreaffirmedthe LCR asan essentialcomponent of the BaselIII reforms.It endorsed a packageof amendmentstothe formulation of the LCRannounced in 2010.Thepackage hasfour elements:1.Revisionstothedefinitionofhigh qualityliquidassets(HQLA) andnetcashoutflows2. Atimetablefor phase-inof the standard3.Areaffirmationoftheusability of thestockof liquid assetsin periodsofstress,includingduringthe transition period4. An agreement for the BaselCommitteeto conduct furtherworkon theinteraction betweenthe LCR and theprovision of central bank facilities.Asummary description of the agreed LCR is inAnnex 1.Thechangestothedefinitionof the LCR, developed and agreed by theBasel Committeeover the past twoyears, includean expansion in therangeof assetseligibleasHQLAand some refinementsto theassumedinflowand outflowratestobetter reflect actual experiencein timesofstress.Thesechangesare set out inAnnex 2.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  3. 3. 3TheGHOSagreedthat the LCR should be subject to phase-inarrangementswhichalign withthosethat applyto the BaselIII capitaladequacyrequirements.Specifically, the LCR will be introduced as planned on 1January 2015, butthe minimum requirement will begin at 60%, rising in equal annual stepsof 10percentagepointstoreach 100% on 1January 2019.This graduated approach isdesigned toensure that theLCR can beintroduced without disruption to the orderlystrengtheningof bankingsystemsor the ongoing financingof economic activity.TheGHOSagreedthat, during periodsof stressit wouldbeentirelyappropriatefor banksto usetheir stock of HQLA, therebyfallingbelowtheminimum.Moreover,it is the responsibilityof bank supervisorstogive guidanceonusabilityaccordingtocircumstances.TheGHOSalsoagreed todaythat, sincedepositswithcentral banks arethemost - indeed, in some cases, the only - reliableform of liquidity, theinteractionbetweentheLCR and theprovisionofcentral bank facilitiesiscriticallyimportant.TheCommitteewill thereforecontinuetoworkonthisissueoverthenextyear.GHOS members endorsedtwoother areasof further analysis.First, theCommitteewill continuetodevelop disclosurerequirementsforbank liquidityand funding profiles.Second, the Committeewill continueto exploretheuse of market-basedindicatorsofliquiditytosupplement theexistingmeasuresbasedonassetclassesand credit ratings.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  4. 4. 4TheGHOSdiscussedandendorsedtheBaselCommitteesmedium-termworkagenda.Followingthesuccessful agreement of the LCR, the Committeewill nowpressahead withthereview of the Net StableFunding Ratio.Thisisacrucialcomponent in thenewframework,extendingthescopeofinternational agreement to the structureof banks debt liabilities.This will be a priority for the Basel Committee over thenext twoyears.Over thenext few years, the Basel Committeewill also:1.Completethe overhaul of the policy framework currentlyunder way2.Continueto strengthen thepeer review programme establishedin 2012tomonitor theimplementationof reformsin individual jurisdictions3.Monitor the impact of, and industry responseto, recent and proposedregulatoryreforms.During 2012the Committeehasbeen examining thecomparabilityofmodel-basedinternal risk weightingsand consideringthe appropriatebalancebetweenthesimplicity, comparability and risk sensitivityof theregulatoryframework.TheGHOSencouraged continuation of thisworkin 2013asa matter ofpriority.Furthermore,theGHOSsupportedtheCommitteesintentiontopromoteeffectivemacro- and microprudential supervision.TheGHOSalsoendorseda new Charter for the Basel Committee.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  5. 5. 5Thenew Charter setsout the Committees objectivesand keyoperatingmodalities,andisdesignedtoimproveunderstandingof theCommitteesactivitiesand decision-makingprocesses.Finally, theGHOSreiteratedtheimportanceof full, timelyandconsistentimplementationof Basel III standards.Mervyn King, Chairman of the GHOS and Governor of the Bank ofEngland, said,"TheLiquidityCoverageRatio is a keycomponent of the BaselIIIframework.Theagreement reachedtoday is a very significant achievement.For thefirst timein regulatoryhistory, wehave a truly global minimumstandard for bank liquidity.Importantly, introducinga phased timetablefor the introduction of theLCR, and reaffirming that a banks stock of liquid assetsareusableintimesof stress, will ensure that thenew liquiditystandard will in nowayhinder the abilityof theglobal banking system tofinancea recovery."Stefan Ingves,Chairman of the BaselCommitteeand Governor of theSverigesRiksbank, noted:"TheamendmentstotheLCR are designedtoensure that it providesasoundminimum standard for bank liquidity- a standard that reflectsactual experienceduring timesof stress.Thecompletion of this work will allowtheBasel Committeeto turn itsattention to refiningthe other component of thenew global liquiditystandards,the Net StableFunding Ratio, whichremainssubject toanobservation period ahead of its implementation in 2018."Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  6. 6. 6Annex 1Summary description of the LCRTopromoteshort-term resilienceof a bank‘sliquidityrisk profile, theBasel Committeedeveloped the LiquidityCoverage Ratio(LCR).This standard aimstoensure that a bank hasan adequate stock ofunencumberedhigh qualityliquid assets(HQLA) whichconsistsof cashor assetsthat canbeconverted intocashat littleor nolossof value inprivate marketstomeet itsliquidityneedsfor a 30calendar day liquiditystressscenario.TheLCR hastwocomponents:(a)Thevalue of thestock of HQLA(b)Total net cashoutflowsand isexpressed as:High Quality Liquid AssetsThenumerator of theLCR is the stock of HQLA.Under thestandard, banksmust hold a stock of unencumberedHQLAtocover thetotal net cashoutflowsover a 30-dayperiod under theprescribedstressscenario.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  7. 7. 7In order toqualify asHQLA, assetsshould be liquid in marketsduring atimeof stressand, in most cases, be eligiblefor usein central bankoperations.Certaintypes of assetswithin HQLA aresubject toa range of haircuts.HQLA are comprised of Level 1and Level 2 assets.Level 1assetsgenerallyincludecash, central bank reserves, and certainmarketablesecuritiesbacked by sovereignsandcentral banks, amongothers.Theseassetsare typically of the highestqualityand the most liquid, andthereis nolimit on the extent towhicha bank canhold theseassetstomeet the LCR.Level 2 assetsare comprised of Level 2Aand Level 2B assetsand includecertainmarketablegovernment securitiesaswellascorporatedebtsecurities,residential mortgage backed securitiesand equitiesthat meetcertainconditions.Level 2 assets(comprisingLevel 2Aand Level 2B assets) are typically ofslightlylesser qualityand may not in aggregate account for more than40% of a bank‘sstock of HQLA.Level 2Bassetsmaynot account for morethan15%of abank‘stotal stockof HQLA.Total net cash outflowsThedenominator of the LCR is thetotal net cash outflows.It is defined astotal expectedcash outflows, minustotal expected cashinflows, in the specified stressscenario for the subsequent 30calendardays.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  8. 8. 8Total expectedcash outflowsare calculatedby multiplying theoutstandingbalancesof variouscategoriesor types of liabilitiesandoff-balancesheet commitmentsbytheratesat whichtheyareexpectedtorun off or bedrawndown.Totalexpectedcashinflowsarecalculatedbymultiplyingtheoutstandingbalancesof variouscategoriesof contractual receivablesbythe ratesatwhichtheyare expected to flow in.Total cashinflowsare subject toan aggregate cap of 75% of totalexpectedcash outflows, therebyensuringa minimum level of HQLAholdingsat all times.Liquidity Coverage RatioThestandardrequiresthat, absent asituationoffinancialstress, thevalueof the ratio beno lowerthan 100% (ie thestockof HQLA should at leastequal total net cashoutflows).Banks are expectedtomeet thisrequirement continuouslyand hold astockof unencumberedHQLAasadefenceagainst thepotential onset ofliquiditystress.During a period of financial stress, however,banksmay usetheir stock ofHQLA, therebyfallingbelow 100%.Important - The 100% threshold isthe minimum requirement absent aperiod of financial stress, and after thephase-in arrangementsarecomplete.Referencesto 100% may be adjustedfor anyphase-inarrangementsinforceat a particular time.Annex 2Complete set of agreedchangesto the LiquidityCoverageRatioBasel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  9. 9. 9HIGH QUALITY LIQUID ASSETS(HQLA)Expand thedefinition of HQLA subject toahigherhaircut and limit-Corporatedebt securitiesratedA+ to BBB– witha 50% haircut- Certainunencumberedequitiessubject to a 50% haircut-Certainresidentialmortgage-backedsecuritiesratedAAorhigherwitha25%haircutAggregate of additional assets,afterhaircuts,subject toa 15% limit of theHQLARatingrequirement onqualifyingLevel 2assets- Use of localrating scalesand inclusion of qualifying commercial paperUsabilityof theliquiditypool-Incorporatelanguagerelatedtotheexpectationthat bankswill usetheirpool of HQLA during periodsof stressOperational requirements- Refineand clarifythe operational requirementsfor HQLAOperation of thecap onLevel 2HQLA- Revise and improve theoperation of thecapAlternative liquidasset (ALA) framework-Develop the alternativetreatmentsand includea fourth option forsharia-compliant banksBasel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  10. 10. 10Central bank reserves-Clarifylanguageto confirm that supervisorshavenational discretion toincludeor excluderequired central bank reserves(aswell asovernightand certain term deposits)asHQLA asthey consider appropriateINFLOWSAND OUTFLOWSInsureddeposits- Reduceoutflow on certain fullyinsuredretail depositsfrom 5% to3%- Reduceoutflow on fullyinsurednon-operationaldepositsfromnon-financial corporates,sovereigns,central banksand publicsectorentities(PSEs) from 40% to20%Non-financial corporate deposits- Reducethe outflow ratefor ―non-operational‖ depositsprovidedbynon-financialcorporates,sovereigns,centralbanksandPSEsfrom75%to40%Committed liquidityfacilitiestonon-financial corporates-Clarifythedefinitionof liquidityfacilitiesandreducethedrawdownrateon theunused portion of committed liquidityfacilitiesto non-financialcorporates,sovereigns, central banks and PSEs from 100% to30%Committed but unfunded inter-financial liquidityand credit facilities-Distinguishbetweeninterbank and inter-financial credit and liquidityfacilitiesand reducethe outflow rateon the former from 100% to40%DerivativesBasel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  11. 11. 11-Additional derivatives risks included in the LCR with a 100% outflow(relates to collateral substitution, and excess collateral that the bank iscontractuallyobligatedto return/ provideif required by a counterparty)-Introducea standardisedapproachfor liquidityrisk related to marketvaluechangesin derivativespositions-Assume net outflowof 0% for derivatives(and commitments) that arecontractuallysecured/ collateralisedbyHQLATradefinance-Includeguidancetoindicatethat a lowoutflowrate(0–5%) is expectedtoapplyEquivalenceof central bank operations-Reducethe outflow rateon maturing secured funding transactionswithcentral banksfrom 25% to0%Client servicing brokerage-Clarifythetreatment of activitiesrelated to client servicing brokerage(whichgenerallylead to an increasein net outflows)OTHERRulestext clarifications-Clearerguidanceon theusabilityof HQLA, and the appropriatesupervisoryresponse, hasbeen developed to ensure that thestock ofliquidassetsis availableto be used whenneeded-Anumber of clarificationstothe rulestext topromote consistentapplication and reducearbitrageopportunities (egoperational depositsBasel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  12. 12. 12from wholesaleclients,derivativescash flows, open maturityloans).Alsoincorporation of previouslyagreed FAQInternationallyagreed phase-in of theLCR- Theminimum LCR in2015wouldbe60%andincreaseby10percentagepointsper year toreach 100% in 2019Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  13. 13. 13Commissioner MichelBarnierThe impact of the latest BaselCommittee liquidity developmentsforCapital Requirements (CRD 4) in theEUInthelight of theGroup of Governorsand Headsof Supervisionmeetingand the Basel Committeeon Banking Supervision pressreleasedated 6January 2013."I welcome theunanimousagreement reachedby the Basel Committeeon therevised liquiditycoverageratio and the gradual approach for itsphasing-in by clearlydefineddates.This is significant progresswhich addressesissuesalreadyraisedby theEuropean Commission.We now need tomake full use of the observation period, and learnfromthereportsthat the European BankingAuthority will prepare on theresultsof the observation period, beforeformallyimplementingin 2015theliquiditycoverageratiounder EU law in linewiththe Baselstandards.Thetreatment of liquidityisfundamental, both for the stabilityof banksaswell asfor their rolein supportingwidereconomicrecovery.I now call upon theParliament and the Council to successfullyconcludetheCRD 4 triloguenegotiationsin thecoming weeks."ContextTheBasel Committeeon Banking Supervision(BCBS) hasagreedapackageof LCR (liquiditycoverage ratio) revisionsunanimously aswellasits2013work plan.TheLCR revisionsincludean expansion of eligible assets,a lessseverecalibration for certain cash flowsand a phasing-inarrangement fromJanuary 2015to2019.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  14. 14. 14Thecurrent Commissionapproachtoliquidityin theCRD4negotiations,namely first a reportingperiodfollowedby comprehensiveEuropean BankingAuthority (EBA) Reportsand subsequentlyadelegatedact bythe Commission todefinethe detailed ratioremains fullyvalid.Background informationTheCommissions approachtoliquidityin CRD 4still remainsvalid inthelight of thelatestBasel Committeeapproval of the revisionof anumber of parametersand calibrationson liquidity(GHOSmeetingof 6January).In the Basel Committee, theEuropean Central Bank, theEuropeanCommissionandvariouscountriesincludingfrom theEU hadarguedforsuch a revision.At the level of the Basel Committee, thefinal packageof LCR revisionswill now be subject toan observation period witha QuantitativeImpactStudy(QIS) that will take placein 2013together withsome otherimportant work that still needsto be completed in the comingyear.TheEU needstotake full benefit of this observation period and learnfrom it, asthis isthefirst time in historythat regulatorsare defininggloballyharmonized, quantitativeliquiditystandards.TheEBA will make reportson the resultsof the observation period forEU banksbeforetheend of 2013.Basedon theevaluation of this work, the Commission will proposedefiningthedetailedLCR through a delegatedact (i.e. legislationadopted by the Commission providednoobjectionsare raised by theEPandthe Council).Nevertheless, important workstill remainsto be completed at the globaland European levels.This includesthedetermination of alternative, market-basedindicatorsfor the definitionof High QualityLiquidAssets(HQLA); thetreatmentof Central Bank facilitieswhichcould impact upon thedefinition ofHQLA and related cash flows;and thetreatment of market valuationchangeson derivativecashflows.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  15. 15. 15In this light, thebestcoursecontinuestobe rapid adoption of theCRD 4packagewhile leavingthe necessaryflexibility toimplement the finaldetailed LCR standard through a delegatedact, takinginto accounttheon-goingworkby Basel and the comprehensiveEBAreports.Subjecttothis approach, thetextson thetablenow of theEuropeanParliament and Council should be adoptedshortly, hopefullyin thecomingweeks.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  16. 16. 16Basel III: The LiquidityCoverage Ratio and liquidity riskmonitoring tools, January 2013Introduction1.This document presentsone of theBaselCommittee‘skey reformsto develop a moreresilient banking sector: theLiquidityCoverage Ratio(LCR).Theobjectiveof theLCR is topromote theshort-term resilienceof the liquidityriskprofile of banks.It doesthis by ensuringthat bankshavean adequatestock ofunencumberedhigh-qualityliquid assets(HQLA) that can be convertedeasilyandimmediatelyin privatemarketsintocashtomeet theirliquidityneedsfor a 30calendar day liquiditystressscenario.TheLCR will improve thebankingsector‘sabilitytoabsorb shocksarisingfrom financial and economicstress, whateverthe source, thusreducingthe riskof spillover from thefinancial sector totherealeconomy.This document setsout the LCR standard and timelinesfor itsimplementation.2.During the early―liquidityphase‖ of the financial crisisthat began in2007,many banks– despiteadequatecapital levels– still experienceddifficultiesbecausetheydid not manage their liquidityin a prudentmanner.Thecrisisdrove home theimportanceof liquiditytotheproperfunctioningof financial marketsand thebanking sector.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  17. 17. 17Prior tothe crisis, asset marketswerebuoyant and funding wasreadilyavailableat low cost.Therapid reversal in market conditionsillustratedhow quicklyliquiditycan evaporate,and that illiquiditycan last for anextendedperiodof time.Thebankingsystem cameunder severestress,whichnecessitatedcentralbank action tosupport both the functioningof money marketsand, insome cases, individual institutions.3.Thedifficultiesexperienced by some banksweredueto lapsesin basicprinciplesof liquidityrisk management.In response, asthe foundation of itsliquidityframework, theCommitteein 2008published Principlesfor Sound LiquidityRiskManagement and Supervision(―Sound Principles‖).TheSound Principlesprovide detailed guidanceon the risk managementand supervisionof funding liquidityrisk and should help promote betterrisk management in thiscritical area, but only if there is fullimplementationby banksand supervisors.As such, the Committeewill continuetomonitor theimplementationbysupervisorstoensurethat banks adheretothese fundamental principles.4.Tocomplement these principles,theCommittee hasfurtherstrengtheneditsliquidityframeworkbydevelopingtwominimumstandardsfor fundingliquidity.Thesestandardshave been developed to achievetwoseparatebutcomplementaryobjectives.Thefirst objectiveistopromoteshort-term resilienceof abank‘sliquidityrisk profile by ensuringthat it hassufficient HQLA tosurvive a significantstressscenario lastingfor one month.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  18. 18. 18TheCommitteedeveloped the LCR toachievethisobjective.Thesecond objectiveis to promoteresilienceover a longer time horizonbycreating additional incentivesfor banks to fund their activitieswithmore stablesourcesof fundingon an ongoingbasis.TheNet StableFundingRatio(NSFR), whichis not coveredby thisdocument, supplementstheLCR and hasa time horizon of one year.It hasbeendevelopedtoprovideasustainablematuritystructureof assetsand liabilities.5.Thesetwostandardsare comprised mainlyof specific parameterswhichare internationally―harmonised‖ with prescribed values.Certainparameters,however, contain elementsof national discretiontoreflect jurisdiction-specificconditions.In thesecases, theparametersshould be transparent and clearlyoutlinedin theregulationsof each jurisdiction toprovide clarityboth withinthejurisdictionand internationally.6.It should be stressedthat the LCR standard establishesa minimumlevel of liquidityfor internationallyactivebanks.Banks are expectedtomeet thisstandard aswell asadhere totheSoundPrinciples.Consistent withtheCommittee‘scapital adequacystandards, nationalauthoritiesmay require higher minimum levelsof liquidity.In particular, supervisorsshould be mindful that theassumptionswithintheLCR may not capture all market conditionsor all periodsof stress.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  19. 19. 19Supervisors are therefore free to require additional levels of liquidity to beheld, if they deem the LCR does not adequately reflect the liquidity risksthat their banks face.7.Giventhat the LCR is, on itsown, insufficient tomeasurealldimensionsof a bank‘sliquidityprofile,the Committeehasalsodeveloped a set of monitoring toolstofurtherstrengthen and promoteglobal consistencyin liquidityrisksupervision.ThesetoolsaresupplementarytotheLCR and are tobeused for ongoingmonitoring of the liquidityriskexposuresof banks, and incommunicatingthese exposuresamong home and host supervisors.8.TheCommitteeisintroducingphase-in arrangementstoimplementtheLCR tohelp ensure that thebankingsectorcan meet thestandardthrough reasonablemeasures,while still supporting lendingto theeconomy.9.TheCommitteeremains firmly of the view that the LCR is an essentialcomponent of the set of reformsintroducedby BaselIII and, whenimplemented, will help delivera more robust and resilient bankingsystem.However,theCommitteehasalsobeenmindful of theimplicationsof thestandard for financial markets,credit extension and economicgrowth, and of introducingthe LCR at a time of ongoing strainsin somebankingsystems.It hasthereforedecidedtoprovidefor a phased introductionof theLCR, in amannersimilartothatoftheBaselIII capitaladequacyrequirements.10.Specifically, the LCR will be introduced as planned on 1 January2015, but the minimum requirement will be set at 60% and rise in equalannual stepstoreach 100% on 1January 2019.This graduated approach, coupled withthe revisionsmade to the2010Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  20. 20. 20publicationof the liquiditystandards, are designed to ensure that theLCR can be introduced without material disruption tothe orderlystrengtheningof banking systemsor theongoing financingof economicactivity.11.TheCommittee alsoreaffirmsitsview that, during periodsof stress,itwouldbe entirelyappropriatefor bankstousetheir stock ofHQLA, therebyfallingbelow the minimum.Supervisorswill subsequentlyassessthis situationand will give guidanceon usability accordingto circumstances.Furthermore, individual countriesthat are receivingfinancial support formacroeconomicand structural reform purposesmay choosea differentimplementationschedulefor their national banking systems, consistentwith the designof their broader economicrestructuringprogramme.12.TheCommitteeiscurrentlyreviewingtheNSFR, whichcontinuestobesubject to an observation period and remainssubject toreview toaddressany unintendedconsequences.It remainstheCommittee‘sintentionthat theNSFR, including anyrevisions,will become a minimum standard by 1January 2018.13.This document isorganisedasfollows:- Part 1definesthe LCR for internationallyactivebanksand dealswithapplicationissues.- Part 2 presentsa set of monitoring tools tobe used by banksandsupervisorsin their monitoring of liquidityrisks.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  21. 21. 21Part 1:The Liquidity Coverage Ratio14.TheCommitteehasdeveloped theLCR to promotetheshort-termresilienceof the liquidityrisk profile of banksby ensuringthat theyhavesufficient HQLA tosurvivea significant stressscenario lasting30calendar days.15.TheLCR should be a key component of the supervisoryapproach toliquidityrisk, but must be supplemented by detailedsupervisoryassessmentsof other aspectsof the bank‘sliquidityrisk managementframeworkin linewiththeSound Principles,theuseof the monitoringtoolsincluded in Part 2, and, in due course,theNSFR.In addition, supervisorsmay require an individual bank toadopt morestringent standardsor parameterstoreflect itsliquidityrisk profile andthesupervisor‘sassessment of its compliancewiththe Sound Principles.I. Objective of the LCR and use of HQLA16.This standard aimsto ensure that a bank hasan adequatestock ofunencumbered HQLA that consistsof cash or assetsthat can beconverted intocash at littleor no lossof value in privatemarkets,tomeetitsliquidityneedsfor a 30 calendar day liquiditystressscenario.At a minimum, the stock of unencumbered HQLAshould enablethebank tosurviveuntil Day 30 of thestressscenario, by whichtime it isassumedthat appropriatecorrectiveactionscanbetakenbymanagementand supervisors,or that thebank can beresolved in an orderlyway.Furthermore,it givesthe central bank additional time totakeappropriatemeasures,should theybe regarded asnecessary.As noted in the Sound Principles,given the uncertain timingof outflowsand inflows, banksare alsoexpected to be awareof any potentialmismatcheswithinthe30-dayperiod and ensure that sufficient HQLAare availabletomeet any cash flowgapsthroughout theperiod.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  22. 22. 2217.TheLCR builds on traditional liquidity―coverageratio‖methodologiesused internallyby banks toassessexposuretocontingentliquidityevents.Thetotal net cash outflowsfor thescenario are tobe calculatedfor 30calendar daysintothe future.Thestandardrequiresthat, absent asituationoffinancialstress, thevalueof the ratio be nolowerthan 100% (ie thestockof HQLA should at leastequal total net cashoutflows) on an ongoingbasisbecause thestock ofunencumbered HQLA is intendedtoserve asa defenceagainstthepotential onset of liquiditystress.During a period of financial stress, however,banksmay usetheir stockofHQLA, therebyfallingbelow 100%, asmaintainingtheLCR at 100%under such circumstancescould produceunduenegative effectson thebank and other market participants.Supervisorswill subsequentlyassessthis situationand will adjust theirresponseflexiblyaccordingtothe circumstances.18.In particular, supervisory decisionsregarding a bank‘suse of itsHQLA should be guided by consideration of the core objective anddefinitionof the LCR.Supervisorsshould exercisejudgement in their assessment and accountnot onlyfor prevailingmacrofinancial conditions,but alsoconsiderforward-lookingassessmentsofmacroeconomicandfinancial conditions.In determiningaresponse,supervisorsshouldbeawarethatsomeactionscould be procyclical if applied in circumstancesof market-widestress.Supervisorsshould seek to take these considerationsintoaccount on aconsistent basisacrossjurisdictions.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  23. 23. 23(a)Supervisorsshould assessconditionsat an earlystage, and takeactionsif deemednecessary, toaddresspotential liquidityrisk.(b)Supervisorsshould allowfor differentiatedresponsestoa reportedLCR below 100%.Any potential supervisory responseshould be proportionatewith thedrivers,magnitude, duration and frequencyof the reportedshortfall.(c)Supervisorsshould assessa number of firm- and market-specificfactorsin determiningthe appropriate response aswell asotherconsiderationsrelated to both domesticand global frameworksandconditions.Potential considerationsinclude, but arenot limitedto:(i)Thereason(s) that the LCR fell below 100%.This includesuseof the stock of HQLA, an inabilityto roll over fundingor largeunexpecteddrawson contingent obligations.In addition, thereasonsmay relate tooverall credit, fundingand marketconditions,includingliquidityin credit, asset and fundingmarkets,affectingindividual banksor all institutions,regardlessof theirowncondition;(ii)Theextent towhich the reporteddeclinein the LCR isdueto afirm-specific or market-wideshock;(iii)Abank‘soverall health and riskprofile, includingactivities,positionswith respect to other supervisoryrequirements,internal risksystems,controlsand other management processes, among others;(iv)Themagnitude,duration and frequency of the reporteddeclineofHQLA;Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  24. 24. 24(v)The potential for contagion to the financial system and additionalrestricted flow of credit or reduced market liquidity due to actions tomaintainan LCR of 100%;(vi)Theavailabilityofothersourcesofcontingent fundingsuchascentralbank funding, or other actionsby prudential authorities.(d) Supervisorsshould have a range of toolsat their disposal toaddressareported LCR below 100%.Banks may use their stock of HQLA in both idiosyncratic and systemicstress events, although the supervisory response may differ between thetwo.(i)At a minimum, a bank shouldpresent an assessment of itsliquidityposition, includingthe factorsthat contributed to itsLCR fallingbelow100%, themeasuresthat havebeenand will betaken andtheexpectationson thepotential length of thesituation.Enhanced reportingtosupervisorsshould be commensurate with theduration of the shortfall.(ii)If appropriate, supervisorscould alsorequire actionsbya bank toreduceitsexposure toliquidityrisk, strengthen itsoverall liquidityriskmanagement, or improve itscontingencyfundingplan.(iii)However, in a situation of sufficientlysevere system-widestress,effectson the entire financial system should be considered.Potential measurestorestoreliquiditylevelsshould be discussed, andshould be executed over a period of timeconsideredappropriate toprevent additional stresson thebank and on thefinancial system asawhole.(e) Supervisors‘responsesshould be consistent withtheoverall approachtothe prudential framework.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  25. 25. 25II. Definition of the LCR19.The scenario for thisstandard entails a combined idiosyncratic andmarket-wideshock that wouldresult in:(a)Therun-off of a proportion of retail deposits;(b) Apartial lossof unsecured wholesalefundingcapacity;(c)Apartial lossof secured, short-term financingwithcertain collateraland counterparties;(d)Additional contractual outflowsthat wouldarisefrom a downgradeinthebank‘spubliccredit ratingby up toand includingthreenotches,includingcollateral posting requirements;(e)Increasesin market volatilitiesthat impact thequalityof collateral orpotential future exposureof derivativepositionsand thusrequire largercollateralhaircutsor additional collateral, or lead toother liquidityneeds;(f)Unscheduleddrawson committed but unused credit and liquidityfacilitiesthat thebank hasprovidedtoitsclients;and(g)Thepotential needfor thebank tobuy back debt or honournon-contractual obligationsin theinterestof mitigatingreputational risk.20.In summary, thestressscenario specified incorporatesmany of theshocksexperiencedduring the crisis that startedin 2007 intoonesignificant stressscenario for whicha bank wouldneed sufficientliquidityon hand tosurvive for up to30calendar days.21.This stresstest should be viewedasa minimum supervisoryrequirement for banks.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  26. 26. 26Banks are expected to conduct their own stressteststo assess the level ofliquidity they should hold beyond this minimum, and construct their ownscenariosthat couldcausedifficultiesfortheir specificbusinessactivities.Such internal stresstestsshould incorporate longer time horizonsthantheonemandatedby thisstandard.Banks are expectedtoshare the resultsof these additional stresstestswith supervisors.22. The LCR hastwocomponents:(a)Valueof thestock of HQLA in stressedconditions;and(b)Total net cashoutflows, calculatedaccording to thescenarioparametersoutlined below.A. Stock of HQLA23. The numerator of the LCR isthe ―stock of HQLA‖.Under thestandard, banksmust hold a stockof unencumberedHQLAtocover thetotal net cashoutflows(asdefinedbelow) over a 30-dayperiodunder theprescribed stressscenario.In order toqualify as―HQLA‖, assetsshould be liquidin marketsduringa time of stressand, ideally, becentral bank eligible.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  27. 27. 27Thefollowingsetsout the characteristicsthat such assetsshouldgenerallypossessand theoperational requirementsthat theyshouldsatisfy.1. Characteristics of HQLA24.Assetsare consideredtobe HQLA if theycan be easilyandimmediatelyconverted intocashat littleor no lossof value.Theliquidityof an asset dependson theunderlying stressscenario, thevolume to be monetisedand the timeframe considered.Nevertheless, there are certainassetsthat are more likelytogeneratefundswithout incurringlargediscountsin sale or repurchaseagreement(repo) marketsdue tofire-saleseven in timesof stress.This section outlinesthe factorsthat influencewhether or not the marketfor an asset can be relied upon to raiseliquiditywhen consideredin thecontext of possiblestresses.Thesefactorsshould assist supervisorsin determiningwhichassets,despitemeeting thecriteria from paragraphs49to 54, are notsufficientlyliquid in private marketstobe included in thestock ofHQLA.(i) Fundamental characteristics- Low risk: assetsthat arelessrisky tend tohave higher liquidity.High credit standing of the issuer and a lowdegreeof subordinationincreasean asset‘sliquidity.Low duration, low legal risk, lowinflationrisk and denomination in aconvertiblecurrencywithlow foreign exchangerisk all enhanceanasset‘sliquidity.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  28. 28. 28- Easeandcertaintyofvaluation:anasset‘sliquidityincreasesif marketparticipantsare more likely to agree on itsvaluation.Assetswithmore standardised, homogenousand simplestructurestend to bemore fungible,promotingliquidity.Thepricingformula of a high-qualityliquid asset must be easytocalculate and not depend on strong assumptions.Theinputsintothepricing formula must alsobe publicly available.In practice, thisshould rule out the inclusion of most structured orexotic products.- Low correlationwithrisky assets:the stock of HQLA should not besubjecttowrong-way(highly correlated) risk.For example, assetsissuedby financial institutionsare more likely tobeilliquid in timesof liquiditystressin thebanking sector.- Listed on a developed and recognised exchange: beinglistedincreasesan asset‘stransparency.(ii) Market-related characteristics- Active and sizablemarket: the asset should have active outright saleor repo marketsat all times.This meansthat:- There should be historical evidenceof market breadth and marketdepth.This could be demonstrated by low bid-askspreads,high tradingvolumes,and a largeand diversenumber of market participants.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  29. 29. 29Diversityof market participantsreducesmarket concentration andincreasesthereliabilityof the liquidityin themarket.- There should be robust market infrastructure in place.- Thepresenceof multiplecommitted market makers increasesliquidityasquoteswill most likely beavailable for buying or sellingHQLA.- Low volatility:Assetswhosepricesremain relativelystableand arelessprone tosharp price declinesover time will have a lowerprobabilityof triggeringforcedsalestomeet liquidityrequirements.Volatilityof traded prices and spreadsare simpleproxymeasuresofmarket volatility.There should be historicalevidenceof relativestabilityof marketterms(eg pricesand haircuts)and volumesduring stressedperiods.- Flight to quality: historically, themarket hasshown tendenciestomove intothese typesof assetsin a systemic crisis.Thecorrelationbetweenproxiesof market liquidityand bankingsystem stressis onesimplemeasure that could be used.25.As outlinedby thesecharacteristics, the test of whetherliquid assetsare of ―high quality‖ is that, by wayof saleor repo, their liquidity-generatingcapacityis assumedto remain intact even in periodsof severeidiosyncraticand market stress.Lower qualityassetstypically fail tomeet that test.An attempt by a bank toraise liquidityfrom lowerqualityassetsunderconditionsof severe market stresswouldentail acceptanceof a largefire-salediscount or haircut tocompensatefor high market risk.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  30. 30. 30That may not only erode themarket‘sconfidencein thebank, but wouldalsogeneratemark-to-market lossesfor banksholding similarinstrumentsand add to the pressure on their liquidityposition, thusencouragingfurther firesalesand declinesin pricesand market liquidity.In thesecircumstances,privatemarket liquidityfor such instrumentsislikely todisappearquickly.26.HQLA (except Level 2B assetsasdefined below) should ideallybeeligibleat central banks for intradayliquidityneedsand overnightliquidityfacilities.In the past, central bankshaveprovideda further backstop tothesupplyof banking system liquidityunder conditionsof severestress.Central bank eligibilityshould thusprovide additional confidencethatbanksare holding assetsthat could be usedin eventsof severe stresswithout damagingthe broader financial system.That in turn wouldraise confidencein the safetyand soundnessofliquidityrisk management in the bankingsystem.27.It should be noted however, that central bank eligibility doesnot byitselfconstitutethebasisfor the categorisationof an asset asHQLA.2. Operational requirements28.All assetsin thestock of HQLAare subject to the followingoperational requirements.Thepurposeof theoperational requirementsisto recognisethat not allassetsoutlinedin paragraphs49-54that meet the asset class,risk-weightingandcredit-ratingcriteriashouldbeeligibleforthestockasthereare other operational restrictionson the availability of HQLA thatcan prevent timelymonetisationduring a stressperiod.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  31. 31. 3129.Theseoperational requirementsare designed to ensure that thestockof HQLA is managed in such a waythat the bank can, and isable todemonstratethat it can, immediatelyusethestock of assetsasasourceofcontingent fundsthat is availablefor thebank toconvert intocashthrough outright saleor repo, to fill fundinggapsbetweencashinflowsand outflowsat anytime during the30-daystressperiod, withnorestriction on the use of theliquiditygenerated.30.Abank shouldperiodicallymonetisearepresentativeproportionoftheassetsin thestock throughrepoor outright sale, in order totest itsaccesstothe market, theeffectivenessof itsprocessesfor monetisation, theavailability of the assets,and tominimisetheriskof negativesignallingduring a period of actual stress.31.All assetsin the stock should be unencumbered.―Unencumbered‖ meansfree of legal, regulatory, contractual or otherrestrictionson the ability of the bank toliquidate,sell, transfer, or assigntheasset.An asset in thestock should not be pledged(either explicitlyorimplicitly) tosecure, collateraliseor credit-enhanceanytransaction, norbedesignatedtocover operational costs(such asrentsand salaries).Assetsreceivedin reverserepoand securitiesfinancingtransactionsthatare held at the bank, have not been rehypothecated, and are legallyandcontractuallyavailablefor the banksuse can be consideredaspart of thestockof HQLA.In addition, assetswhichqualify for the stock of HQLAthat have beenpre-positionedor deposited with, or pledgedto, the central bank or apublic sector entity(PSE) but have not been used to generateliquiditymay be includedin thestock.32.Abank should excludefrom thestock thoseassetsthat, althoughmeetingthedefinitionof ―unencumbered‖ specified in paragraph 31, theBasel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  32. 32. 32bank wouldnot have theoperational capability tomonetise tomeetoutflowsduring thestressperiod.Operational capabilitytomonetiseassetsrequireshavingprocedures andappropriatesystemsin place, includingproviding the function identifiedin paragraph 33 withaccesstoall necessary information to executemonetisationof anyasset at any time.Monetisationof theasset must be executable,from an operationalperspective, in the standard settlement period for the asset classin therelevant jurisdiction.33.Thestock should be under the control of the function charged withmanagingthe liquidityof thebank (eg the treasurer), meaning thefunctionhasthe continuousauthority, and legal and operationalcapability, tomonetiseanyasset in the stock.Controlmustbeevidencedeitherbymaintainingassetsin aseparatepoolmanaged by the function withthe soleintent for useasa source ofcontingent funds,orbydemonstratingthat thefunctioncan monetisetheasset at any point in the 30-daystressperiod and that theproceedsofdoing soare availableto thefunction throughout the 30-daystressperiodwithout directlyconflictingwitha statedbusinessor risk managementstrategy.For example, an asset should not be included in the stock if the saleofthat asset, without replacement throughout the30-dayperiod, wouldremove a hedge that wouldcreatean open risk position in excessofinternallimits.34.Abank is permittedtohedgethemarket risk associatedwithownership of the stock of HQLA and still includethe assetsin the stock.If it choosestohedgethemarket risk, the bank should take intoaccount(in the market valueapplied toeach asset) thecash outflow that wouldBasel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  33. 33. 33ariseif the hedgeweretobe closed out early (in theevent of theassetbeingsold).35.In accordance with Principle 9 of the Sound Principlesa bank ―shouldmonitor the legal entity and physical location where collateral is held andhow it may bemobilised in a timely manner‖.Specifically, it should have a policy in placethat identifieslegalentities, geographicallocations,currenciesand specificcustodial orbank accountswhereHQLA are held.In addition, thebank should determinewhetheranysuch assetsshouldbeexcluded for operational reasonsand therefore, havethe ability todeterminethecompositionof itsstock on a daily basis.36.As noted in paragraphs171and 172, qualifying HQLAthat are held tomeet statutoryliquidityrequirementsat the legal entityor sub -consolidatedlevel (whereapplicable) mayonlybeincludedinthestock attheconsolidatedlevel tothe extent that therelated risks(asmeasured bythelegal entity‘s or sub-consolidated group‘snet cash outflowsin theLCR) are alsoreflectedin the consolidated LCR.Any surplusof HQLAheld at thelegal entitycan onlybe included in theconsolidatedstock if thoseassetswouldalsobe freelyavailableto theconsolidated(parent) entityin timesof stress.37.In assessingwhetherassetsare freely transferablefor regulatorypurposes,banksshouldbeawarethat assetsmaynot befreelyavailabletotheconsolidatedentitydueto regulatory, legal, tax, accountingor otherimpediments.Assetsheld in legal entitieswithout market accessshould onlybeincludedto the extent that theycan be freelytransferredtoother entitiesthat could monetise theassets.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  34. 34. 3438.In certain jurisdictions,large, deep and activerepomarketsdo notexistfor eligibleasset classes,and thereforesuch assetsare likelyto bemonetised through outright sale.In thesecircumstances, a bank should exclude from thestock of HQLAthoseassetswherethere areimpedimentsto sale,such aslarge fire-salediscountswhichwouldcauseit to breach minimum solvencyequirements,or requirementstohold suchassets, including, but notlimitedto, statutoryminimum inventoryrequirementsfor marketmaking.39.Banksshouldnot includein thestockofHQLA anyassets,orliquiditygeneratedfrom assets,theyhavereceivedunder right ofrehypothecation, if thebeneficial ownerhasthe contractual right towithdraw thoseassetsduring the 30-daystressperiod.40.Assetsreceived ascollateral for derivativestransactionsthat are notsegregated and arelegallyable to be rehypothecated may be included inthestock ofHQLAprovided that thebank recordsanappropriateoutflowfor the associatedrisksasset out in paragraph 116.41.Asstatedin Principle8of theSound Principles,abank shouldactivelymanageitsintradayliquiditypositionsand risksto meet payment andsettlement obligationson a timelybasisunder both normal and stressedconditionsandthuscontributetothesmoothfunctioningof payment andsettlement systems.Banks and regulatorsshould be awarethat theLCR stressscenario doesnot cover expected or unexpectedintradayliquidityneeds.42.While theLCR isexpectedtobemet andreportedinasinglecurrency, banksare expected tobe abletomeet their liquidityneedsineachcurrencyand maintain HQLAconsistent withthe distributionoftheir liquidityneedsbycurrency.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  35. 35. 35Thebank should be abletousethestock to generateliquidityin thecurrencyand jurisdictionin whichthenet cash outflowsarise.Assuch, theLCR bycurrencyisexpectedtobemonitoredandreportedtoallowthebank and itssupervisor totrack anypotential currencymismatchissuesthat could arise, asoutlinedin Part 2.In managingforeign exchangeliquidityrisk, the bank should takeintoaccount therisk that its abilityto swapcurrencies and accesstherelevant foreign exchangemarketsmay eroderapidlyunder stressedconditions.It should be awarethat sudden, adverseexchangerate movementscouldsharplywidenexistingmismatchedpositionsand alter theeffectivenessof anyforeign exchangehedgesin place.43. In order tomitigate cliff effectsthat could arise, if an eligibleliquidasset became ineligible(egduetoratingdowngrade),abank ispermittedtokeep such assetsin its stock of liquid assetsfor an additional 30calendar days.Thiswouldallowthebank additionaltimetoadjust itsstock asneededorreplace theasset.3. Diversification of the stock of HQLA44.Thestock of HQLA should bewelldiversifiedwithin theasset classesthemselves(except for sovereign debt of thebank‘shome jurisdictionorfrom thejurisdictionin whichthe bank operates;central bank reserves;central bank debt securities;and cash).Although some asset classes are more likely to remain liquid irrespectiveof circumstances, ex-ante it is not possible to know with certainty whichspecific assetswithineach asset classmight be subjecttoshocksex-post.Banks should thereforehave policiesand limitsin place in order toBasel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  36. 36. 36avoid concentrationwith respect to asset types, issueand issuertypes, and currency (consistent withthedistributionof net cashoutflowsbycurrency) withinasset classes.4. Definition of HQLA45.Thestock of HQLA should comprise assetswiththecharacteristicsoutlined in paragraphs24-27.This section describesthe type of assetsthat meet thesecharacteristicsand can thereforebe included in the stock.46.There aretwocategories of assetsthat can be included in thestock.Assetstobe included in each categoryare thosethat the bank is holdingon thefirst dayof thestressperiod, irrespectiveof their residual maturity.―Level 1‖assetscan be included without limit, while ―Level 2‖ assetscanonlycompriseup to 40% of thestock.47.Supervisorsmay alsochoosetoincludewithin Level 2 anadditionalclassof assets(Level 2B assets- see paragraph 53below).If included, theseassetsshould compriseno more than 15% of the totalstockof HQLA.Theymust alsobe included withintheoverall 40% cap on Level 2 assets.48.The40% cap onLevel 2 assetsand the15% cap on Level 2B assetsshould be determined after theapplication of required haircuts, and aftertakingintoaccount theunwindof short-term securitiesfinancingtransactionsand collateralswaptransactionsmaturingwithin30calendardays that involve theexchangeof HQLA.In this context, short term transactionsare transactionswitha maturitydate up toand including30 calendar days.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  37. 37. 37Thedetails of the calculationmethodology areprovided inAnnex 1.(i) Level 1assets49.Level 1assetscan comprisean unlimitedshareof thepool and are notsubjecttoa haircut under theLCR.However,national supervisorsmay wishto require haircutsfor Level 1securitiesbased on, amongother things,their duration, credit andliquidityrisk, and typical repohaircuts.50. Level 1assetsare limitedto:(a)Coinsand banknotes;(b)Central bank reserves(includingrequired reserves), to theextent thatthecentral bank policiesallowthem tobe drawndown in timesof stress;(c)Marketablesecuritiesrepresenting claimson or guaranteed bysovereigns, central banks, PSEs, theBank for InternationalSettlements,the International MonetaryFund, the European CentralBank and European Community, or multilateral development banks, andsatisfyingall of thefollowingconditions:- assigned a 0% risk-weight under theBasel II StandardisedApproachfor credit risk;- tradedin large,deep andactiverepoorcashmarketscharacterisedbya low level of concentration;- havea proven record asa reliablesourceof liquidityin the markets(repoor sale) even during stressedmarket conditions;and- not an obligationof a financial institutionor any of itsaffiliatedentities.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  38. 38. 38(d)wherethe sovereign has a non-0% risk weight, sovereignor centralbank debt securitiesissuedin domestic currenciesby thesovereign orcentral bank in thecountry in whichthe liquidityriskis being takenor inthebank‘shome country; and(e)wherethe sovereignhas a non-0% risk weight, domestic sovereignorcentral bank debt securitiesissued in foreign currenciesare eligible up totheamount of the bank‘sstressednet cashoutflowsin that specificforeign currencystemmingfrom the bank‘soperationsin thejurisdictionwherethebank‘sliquidityriskis being taken.(ii) Level 2assets51.Level 2 assets(comprisingLevel 2Aassetsand any Level 2B assetspermittedby the supervisor) can be includedin the stock ofHQLA, subject totherequirement that they comprise nomore than40% of theoverall stock after haircutshavebeen applied.52.A15%haircut isapplied tothe current market value of each Level 2Aasset held in thestock of HQLA.Level 2Aassets are limited to the following:(a)Marketablesecuritiesrepresenting claimson or guaranteed bysovereigns, central banks, PSEs or multilateral development banksthatsatisfyall of the followingconditions:- assigneda20% risk weight under theBaselII StandardisedApproachfor credit risk;- tradedin large,deep andactiverepoor cashmarketscharacterisedbya low level of concentration;- havea proven record asa reliablesourceof liquidityin the markets(repoor sale) even during stressedmarket conditions(ie maximumBasel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  39. 39. 39declineof pricenot exceeding10% or increasein haircut notexceeding10percentagepointsover a 30-dayperiod duringa relevantperiod of significant liquiditystress);and- not an obligationof a financial institutionor any of itsaffiliatedentities.(b)Corporate debt securities(includingcommercial paper) and coveredbondsthat satisfy all of thefollowingconditions:- in thecaseof corporate debt securities:not issued by a financialinstitution or any of itsaffiliatedentities;- in thecaseof covered bonds:not issuedbythebank itself oranyof itsaffiliatedentities;- either(i)havea long-term credit rating from a recognisedexternal creditassessment institution(ECAI) of at least AA-21or in the absence of alongterm rating, a short-term ratingequivalent in qualitytothelong-term rating; or(ii)donot have a credit assessment by a recognisedECAI but areinternallyrated ashavinga probabilityof default (PD) correspondingtoa credit ratingof at leastAA-;- tradedin large,deep andactiverepoor cashmarketscharacterisedbya low level of concentration; and- have a proven record as a reliable source of liquidity in the markets(repo or sale) even during stressed market conditions: ie maximumdecline of price or increase in haircut over a 30-day period during arelevant period of significant liquiditystressnot exceeding10%.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  40. 40. 40(iii) Level 2B assets53.Certainadditional assets(Level 2B assets) may be includedin Level 2at the discretion of national authorities.In choosing to include these assets in Level 2 for the purpose of theLCR, supervisors are expected to ensure that such assets fully complywith thequalifying criteria.Supervisorsare alsoexpectedtoensure that bankshave appropriatesystemsand measurestomonitor and control the potential risks (egcredit and market risks)that bankscould be exposed toin holding theseassets.54.Alargerhaircut isappliedtothecurrent market valueofeachLevel2Basset held in thestock of HQLA.Level 2B assetsare limitedtothe following:(a)Residential mortgagebacked securities(RMBS) that satisfyall of thefollowingconditionsmay be includedin Level 2B, subject to a 25%haircut:- not issued by, and the underlying assetshave not been originated bythebank itself or any of its affiliatedentities;- havea long-term credit rating from a recognised ECAI ofAA orhigher, or in the absenceof a longterm rating, a short-term ratingequivalent in qualityto the long-term rating;- tradedin large,deep andactiverepoor cashmarketscharacterisedbya low level of concentration;- havea proven record asa reliablesourceof liquidityin the markets(repoor sale) even during stressedmarket conditions,ie a maximumdeclineofpricenot exceeding20%orincreaseinhaircut overa30-dayBasel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  41. 41. 41period not exceeding20percentagepointsduring a relevant period ofsignificant liquiditystress;- theunderlying asset pool is restricted to residential mortgagesandcannot contain structured products;- theunderlying mortgagesare ―full recourse‘‘loans(ie in thecaseofforeclosurethe mortgage ownerremainsliablefor anyshortfall insalesproceedsfrom the property) and have a maximum loan-to-valueratio (LTV) of 80% on average at issuance;and- thesecuritisationsare subjectto―risk retention‖ regulationswhichrequireissuersto retain an interest in theassetstheysecuritise.(b)Corporate debt securities (including commercial paper) that satisfy allof the following conditionsmay be included in Level 2B, subject to a 50%haircut:- not issued by a financial institutionor any of its affiliatedentities;- either- (i) havealong-termcredit ratingfromarecognisedECAI betweenA+and BBB- or in the absenceof a longterm rating, a short-term ratingequivalent in qualityto the long-term rating;or- (ii) do not have a credit assessment by a recognised ECAI and areinternally rated as having a PD corresponding to a credit rating ofbetweenA+ and BBB-;- tradedin large,deep andactiverepoor cashmarketscharacterisedbya low level of concentration; and- havea proven record asa reliablesourceof liquidityin the markets(repoor sale) even during stressedmarket conditions,ie a maximumdeclineofpricenot exceeding20% orincreaseinhaircut overa30-dayBasel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  42. 42. 42period not exceeding20percentagepointsduring a relevant period ofsignificant liquiditystress.(c)Common equitysharesthat satisfy all of the followingconditionsmaybe included in Level 2B, subject to a 50% haircut:- not issued by a financial institutionor any of its affiliatedentities;- exchangetraded and centrallycleared;- a constituent of the major stock index in thehome jurisdictionorwherethe liquidityrisk is taken, asdecidedby the supervisor in thejurisdictionwherethe index is located;- denominatedin thedomesticcurrencyof a bank‘shome jurisdictionor in thecurrencyof the jurisdictionwherea bank‘sliquidityrisk istaken;- tradedin large,deep andactiverepoor cashmarketscharacterisedbya low level of concentration; and- havea proven record asa reliablesourceof liquidityin the markets(repoor sale) even during stressedmarket conditions,ie a maximumdeclineof sharepricenot exceeding40% or increasein haircut notexceeding40percentagepointsover a30-dayperiodduring arelevantperiod of significant liquidity.(iv) Treatment for jurisdictions with insufficient HQLA(a) Assessment of eligibility for alternative liquidity approaches(ALA)55. Some jurisdictionsmay have an insufficient supplyof Level 1assets(orbothLevel 1andLevel 2assets)intheir domestic currencytomeet theaggregate demand of bankswith significant exposures in this currency.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  43. 43. 43Toaddressthis situation, the Committeehasdeveloped alternativetreatmentsfor holdingsin the stock of HQLA, whichare expectedtoapplytoa limitednumber of currenciesand jurisdictions.Eligibilityfor suchalternativetreatment will bejudgedon thebasisof thequalifying criteria set out in Annex 2 and will be determined through anindependent peer review processoverseen by the Committee.The purpose of this processis to ensure that the alternative treatmentsareonlyused when there is a true shortfall in HQLA in the domestic currencyrelativetotheneedsin that currency.56.Toqualify for thealternativetreatment, a jurisdiction should be abletodemonstrate that:- thereis an insufficient supplyof HQLAin its domesticcurrency, takingintoaccount all relevant factorsaffectingthesupplyof, and demand for, such HQLA;- theinsufficiencyis caused by long-term structural constraintsthatcannot be resolved withinthe medium term;- it hasthe capacity, through any mechanismor control in place, tolimit or mitigatetherisk that thealternativetreatment cannot workasexpected;and- it is committed to observingthe obligationsrelatingto supervisorymonitoring, disclosure, and periodic self-assessment andindependent peer review of itseligibilityfor alternativetreatment.All of the above criteria have to be met to qualify for the alternativetreatment.57.Irrespectiveof whethera jurisdictionseekingALA treatment willadopt thephase-in arrangement set out inparagraph 10for implementingBasel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  44. 44. 44theLCR, the eligibilityfor that jurisdictionto adopt ALA treatment willbebased on a fullyimplemented LCR standard (ie 100% requirement).(b) Potential options for alternative treatment58.Option 1– Contractual committed liquidityfacilitiesfrom therelevantcentral bank, witha fee:For currenciesthat donot have sufficient HQLA, asdetermined byreferenceto thequalifying principlesand criteria, Option 1wouldallowbanksto accesscontractual committed liquidityfacilitiesprovidedbytherelevant central bank (ie relevant giventhecurrencyinquestion) for afee.Thesefacilitiesshould not be confused withregular central bankstandingarrangements.In particular, these facilities are contractual arrangements between thecentral bank and the commercial bank with a maturity date which, at aminimum, fallsoutsidethe 30-dayLCR window.Further, thecontract must beirrevocableprior tomaturityand involvenoex-post credit decisionby the central bank.Such facilities areonlypermissibleif thereis alsoa feefor thefacilitywhichis charged regardless of the amount, if any, drawn downagainstthat facilityand thefeeis set sothat banks whichclaim the facility linetomeet the LCR, and bankswhichdo not, have similar financial incentivesto reducetheir exposure toliquidityrisk.That is, the feeshould be set sothat thenet yield on the assetsusedtosecure the facilityshould not be higher thanthenet yield on arepresentativeportfolio of Level 1and Level 2 assets,after adjustingforanymaterial differencesin credit risk.Ajurisdictionseekingtoadopt Option1shouldjustify in theindependentpeer review that thefee is suitablyset in a manner asprescribedin thisBasel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  45. 45. 45paragraph.59.Option 2 – Foreign currency HQLA tocover domestic currencyliquidityneeds:For currenciesthat donot have sufficient HQLA, asdeterminedbyreferenceto thequalifying principlesand criteria, Option 2wouldallowsupervisorstopermit banks that evidencea shortfall of HQLA in thedomesticcurrency(which wouldmatchthe currencyof the underlyingrisks)toholdHQLA in acurrencythat doesnot matchthecurrencyoftheassociated liquidityrisk, provided that theresultingcurrency mismatchpositionsare justifiableand controlledwithin limitsagreedbytheirsupervisors.Supervisorsshould restrict such positionswithinlevelsconsistent withthebank‘sforeign exchangeriskmanagement capacityand needs, andensure that suchpositionsrelateto currenciesthat are freelyand reliablyconvertible, are effectivelymanagedby the bank, and wouldnot poseunduerisk to itsfinancial strength.In managingthose positions,thebank should take intoaccount therisksthat itsabilitytoswapcurrencies,and itsaccessto therelevant foreignexchangemarkets, may eroderapidlyunder stressedconditions.It should alsotake intoaccount that sudden, adverse exchangeratemovementscould sharply widenexistingmismatchpositionsand altertheeffectivenessof anyforeign exchangehedgesin place.60.To account for foreign exchange risk associated with foreign currencyHQLA used to cover liquidity needsin the domestic currency, such liquidassetsshould be subject to a minimum haircut of 8% for major currenciesthat are activein global foreign exchangemarkets.For other currencies, jurisdictionsshould increasethe haircut toanappropriatelevel on thebasisof historical (monthly) exchangeratevolatilitiesbetweenthe currencypair over an extended period of time.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  46. 46. 46If the domesticcurrencyisformallypeggedtoanother currencyunder aneffectivemechanism, the haircut for thepegged currencycan be loweredtoa level that reflectsthe limitedexchangerate risk under thepegarrangement.Toqualify for this treatment, the jurisdictionconcernedshoulddemonstratein the independent peer review theeffectivenessof itscurrencypeg mechanism and assessthe long-term prospect of keepingthepeg.61.HaircutsforforeigncurrencyHQLA usedunderOption2wouldapplyonlyto HQLA in excessof a threshold specifiedby supervisorswhichisnot greater than 25%.This is toaccommodate a certain level of currencymismatchthat maycommonlyexist among banks in their ordinary courseof business.62.Option3 –Additional useof Level 2assetswitha higher haircut:Thisoptionaddressescurrenciesforwhichthereareinsufficient Level 1assets,asdetermined by referenceto thequalifying principlesandcriteria, but wherethere are sufficient Level 2Aassets.In this case, supervisorsmay choosetoallowbanksthat evidenceashortfall of HQLA in thedomesticcurrency(tomatch thecurrencyof theliquidityrisk incurred) to hold additional Level 2Aassetsin the stock.Theseadditional Level 2Aassetswouldbe subject to a minimum haircutof 20%, ie 5% higher than the 15% haircut applicableto Level 2Aassetsthat are includedin the 40% cap.Thehigher haircut isused tocover anyadditional price and marketliquidityrisksarisingfrom increasedholdingsof Level 2Aassetsbeyondthe40% cap, and toprovide a disincentivefor banks touse this optionbased on yield considerations.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  47. 47. 47Supervisorshave theobligationto conduct an analysisto assesswhethertheadditional haircut is sufficient for Level 2Aassetsin their markets,andshouldincreasethehaircut if thisiswarrantedtoachievethepurposeforwhichit isintended.Supervisorsshould explainand justify the outcomeof the analysis(includingthe level of increasein the haircut, if applicable) during theindependent peerreview assessment process.Any Level 2Bassetsheldbythebank wouldremain subject tothe cap of 15%, regardlessof theamount of other Level 2 assetsheld.(c) Maximum level of usage of options for alternative treatment63. The usage of any of the above optionswould be constrained by a limitspecified by supervisors in jurisdictions whose currency is eligible for thealternativetreatment.Thelimit should beexpressed in termsof the maximum amount ofHQLA associated withtheuse of theoptions(whetherindividuallyor incombination) that abank isallowedtoincludeinitsLCR, asapercentageof the total amount of HQLA thebank isrequired tohold in the currencyconcerned.HQLA associated withtheoptionsrefer to:(i)In thecaseof Option 1, the amount of committed liquidityfacilitiesgranted by therelevant central bank;(ii)In thecaseofOption2, theamount offoreigncurrencyHQLA usedtocover theshortfall of HQLA in the domestic currency; and(iii)In thecaseof Option 3, theamount of Level 2 assetsheld (includingthosewithin the40% cap).64. If, for example, the maximum level of usageof the optionsis set at80%, it meansthat abank adopting theoptions, either individuallyor inBasel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  48. 48. 48combination, wouldonlybe allowedtoincludeHQLA associatedwith theoptions(afterapplying anyrelevant haircut) up to80% of therequiredamount of HQLA in therelevant currency.Thus,at least 20%of theHQLArequirement will havetobemet byLevel1assetsin the relevant currency.Themaximum usageoftheoptionsisofcoursefurtherconstrainedbythebank‘sactual shortfall of HQLA in thecurrencyconcerned.65. The appropriatenessof themaximum level of usageof the optionsallowedby a supervisorwill be evaluatedin the independent peer reviewprocess.Thelevel set should be consistent withthe projected size of theHQLAgapfaced by bankssubjecttothe LCR in the currencyconcerned, takingintoaccount all relevant factorsthat may affect thesize of the gap overtime.Thesupervisor should explain how thislevel is derived, and justifywhythisis supportedbythe insufficiencyof HQLA in the banking system.Where a relatively high level of usage of the optionsisallowed by thesupervisor (eg over 80%), the suitability of this level will come undercloserscrutinyin theindependent peer review.(d) Supervisory obligations and requirements66. Ajurisdiction with insufficient HQLA must, among other things, fulfilthe following obligations (the detailed requirements are set out in Annex2):- Supervisorymonitoring: There should be a clearlydocumentedsupervisoryframework for overseeingand controllingtheusageof theoptionsby itsbanks, and for monitoring their compliance withtherelevant requirementsapplicableto their use of theoptions;Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  49. 49. 49- Disclosureframework:Thejurisdictionshould discloseitsframeworkfor applying the optionstoitsbanks (whetheron itswebsiteorthrough other means).Thedisclosureshould enableother national supervisorsandstakeholderstogaina sufficient understandingof itscompliancewiththequalifying principlesand criteria and themanner in whichitsupervisestheuse of the optionsby itsbanks;- Periodic self-assessment of eligibilityfor alternativetreatment: Thejurisdictionshould perform a self-assessment of itseligibilityforalternativetreatment every fiveyears after it has adopted theoptions,and disclosethe resultstoother national supervisorsandstakeholders.67.Supervisorsin jurisdictionswith insufficient HQLA should deviserules and requirementsgoverning theuse of theoptionsbytheirbanks, havingregard totheguiding principlesset out below.- Principle1:Supervisorsshouldensurethat banks‘useoftheoptionsisnot simplyaneconomicchoicethat maximisestheprofitsof thebankthrough theselection of alternativeHQLA basedprimarilyon yieldconsiderations.Theliquiditycharacteristics of an alternativeHQLAportfolio must be considered to be moreimportant than itsnet yield.- Principle2: Supervisorsshould ensure that theuseof the optionsisconstrained, bothforall bankswithexposuresin therelevant currencyand on a bank-by-bank basis.- Principle3: Supervisorsshould ensure that bankshave, totheextentpracticable,taken reasonablestepsto use Level 1and Level 2assetsand reducetheir overall level of liquidityrisk to improve theLCR, beforethealternativetreatment can be applied.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  50. 50. 50- Principle4: Supervisorsshould have a mechanism for restrainingtheusageof the optionsto mitigate risksof non-performanceof thealternativeHQLA.(v) Treatment for Shari‘ah compliant banks68. Shari‘ah compliant banksfacea religiousprohibition on holdingcertaintypesof assets,such asinterest-bearingdebt securities.Even in jurisdictionsthat have a sufficient supplyof HQLA, aninsurmountableimpediment tothe abilityof Shari‘ah compliant bankstomeet the LCR requirement may still exist.In such cases, national supervisorsin jurisdictionsin whichShari‘ahcompliant banksoperate have the discretionto defineShari‘ahcompliantfinancial products(such asSukuk) asalternativeHQLA applicabletosuch banks only, subjecttosuch conditionsor haircutsthat thesupervisorsmay require.It should be noted that the intention of this treatment isnot toallowShari‘ahcompliant bankstohold fewer HQLA.Theminimum LCR standard, calculatedbased on alternativeHQLA(post-haircut) recognised asHQLA for thesebanks, should not be lowerthan the minimum LCR standard applicableto other banksin thejurisdictionconcerned.National supervisorsapplying suchtreatment for Shari‘ah compliantbanksshould comply withsupervisory monitoring and disclosureobligationssimilar tothoseset out in paragraph 66above.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  51. 51. 51B. Total net cash outflows69. The term total net cash outflows is defined as the total expected cashoutflowsminustotal expected cash inflowsin the specified stressscenariofor the subsequent 30 calendar days.Total expectedcash outflowsare calculatedby multiplying theoutstandingbalancesof variouscategoriesor types of liabilitiesandoff-balancesheet commitmentsbytheratesat whichtheyareexpectedtorun off or bedrawndown.Totalexpectedcashinflowsarecalculatedbymultiplyingtheoutstandingbalancesof variouscategoriesof contractual receivablesbythe ratesatwhichtheyare expected to flow in under the scenario up to an aggregatecap of 75% of total expectedcashoutflows.70.While most roll-off rates,draw-downratesand similar factorsareharmonisedacrossjurisdictionsasoutlinedin thisstandard, a fewparametersaretobedeterminedbysupervisoryauthoritiesat thenationallevel.Where this is the case, theparametersshould be transparent and madepublicly available.71.Annex 4providesa summary of the factorsthat are applied to eachcategory.72.Banks will not bepermitted todouble count items,ie if an assetisincludedaspart of the―stock of HQLA‖ (ie the numerator), theassociated cashinflowscannot alsobe counted ascash inflows(ie part ofthedenominator).Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  52. 52. 52Wherethereispotential that anitemcouldbecountedin multipleoutflowcategories,(egcommitted liquidityfacilitiesgranted tocover debtmaturing within the30calendar day period), a bank onlyhasto assumeup tothemaximum contractual outflow for that product.1. Cash outflows(i) Retail deposit run-off73.Retail depositsaredefinedasdepositsplacedwithabank byanaturalperson.Depositsfrom legal entities,sole proprietorshipsor partnershipsarecaptured in wholesaledeposit categories.Retail depositssubject to the LCR includedemand deposits and termdeposits,unlessotherwiseexcludedunder the criteriaset out inparagraphs82and 83.74.Theseretail depositsare divided into―stable‖ and ―lessstable‖portionsof fundsasdescribed below, withminimum run-off rateslistedfor each category.The run-off rates for retail deposits are minimum floors, with higherrun-off rates established by individual jurisdictions as appropriate tocapture depositorbehaviour in a period of stressin each jurisdiction.(a) Stable deposits (run-off rate = 3% and higher)75. Stabledeposits, whichusuallyreceivea run-off factor of 5%, are theamount of the depositsthat are fullyinsuredby an effectivedepositinsurancescheme or by a public guaranteethat providesequivalentprotectionand where:Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  53. 53. 53- thedepositorshave other establishedrelationshipswiththebank thatmake deposit withdrawalhighly unlikely; or- thedepositsare in transactional accounts(eg accountswheresalariesare automaticallydeposited).76. For the purposesof this standard, an―effectivedeposit insurancescheme‖ refers toa scheme(i) That guaranteesthat it hasthe ability tomake prompt payouts,(ii) For whichthe coverageis clearlydefined and(iii) Of whichpublic awarenessishigh.Thedeposit insurer in an effectivedeposit insurancescheme has formallegal powerstofulfil its mandate and is operationallyindependent, transparent and accountable.Ajurisdictionwith an explicit and legallybindingsovereigndepositguaranteethat effectively functionsasdeposit insurancecan be regardedashaving an effectivedeposit insurancescheme.77.Thepresenceof deposit insurancealoneis not sufficient toconsider adeposit ―stable‖.78.Jurisdictionsmay choosetoapplya run-off rate of 3% tostabledepositsin their jurisdiction, if theymeet theabovestabledeposit criteria and thefollowingadditionalcriteria for deposit insuranceschemes:- theinsuranceschemeis basedon a system of prefundingviatheperiodic collectionof levies on banks withinsured deposits;- theschemehasadequatemeansof ensuring ready accesstoadditional funding in the event of a largecall on itsreserves,eg anBasel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  54. 54. 54explicit and legallybindingguaranteefrom thegovernment, or astandingauthority toborrow from thegovernment- accesstoinsured depositsisavailableto depositorsin a short periodof time once the deposit insurancescheme is triggered.Jurisdictionsapplying the 3% run-off rate to stabledepositswithdepositinsurancearrangementsthat meet the above criteria should be abletoprovideevidenceof run-off ratesfor stabledepositswithin thebankingsystem below 3% during anyperiodsof stressexperienced that areconsistent withtheconditionswithintheLCR.(b) Lessstable deposits (run-off rates = 10%and higher)79.Supervisoryauthoritiesare expectedtodevelop additional bucketswithhigherrunoffratesasnecessarytoapplytobucketsofpotentiallylessstableretail depositsin their jurisdictions, withaminimum run-offrate of10%.Thesejurisdiction-specificrun-off ratesshould be clearlyoutlinedandpublicly transparent.Bucketsof lessstabledepositscould includedepositsthat are not fullycoveredby an effectivedeposit insurancescheme or sovereign depositguarantee, high-valuedeposits, depositsfrom sophisticatedor high networthindividuals,depositsthat can be withdrawnquickly(eg internetdeposits)and foreign currencydeposits,asdetermined by eachjurisdiction.80.If a bank is not ableto readily identifywhichretail depositswouldqualify as―stable‖ according to theabove definition(eg thebank cannotdeterminewhichdepositsare coveredbyan effectivedeposit insuranceschemeor a sovereign deposit guarantee), it should place thefull amountin the ―lessstable‖ bucketsasestablished by itssupervisor.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  55. 55. 5581.Foreigncurrencyretaildepositsaredepositsdenominatedin anyothercurrencythan the domestic currencyin a jurisdictionin whichthe bankoperates.Supervisorswill determinethe run-off factor that banksin theirjurisdictionshould usefor foreign currency deposits.Foreigncurrencydepositswill be consideredas―lessstable‖ if there isareason tobelieve that suchdepositsare more volatile than domesticcurrencydeposits.Factorsaffectingthevolatilityof foreign currencydepositsincludethetype and sophisticationof the depositors, and thenature of such deposits(egwhetherthedepositsare linked to businessneedsin thesamecurrency, or whetherthedepositsareplaced in a search for yield).82.Cash outflowsrelatedtoretail term depositswith a residual maturityorwithdrawal notice period of greater than 30days will be excluded fromtotal expectedcashoutflowsif the depositor hasno legal right towithdraw deposits within the30-dayhorizon of theLCR, or if earlywithdrawal resultsin a significant penaltythat ismateriallygreater thanthelossof interest.83.If a bank allowsa depositor towithdraw such depositswithoutapplying the correspondingpenalty, or despitea clausethat says thedepositorhasnolegal right to withdraw, the entire categoryof thesefundswouldthen have to be treated asdemand deposits(ie regardlessof theremainingterm, the depositswouldbe subject tothedeposit run-off ratesasspecified in paragraphs74-81).Supervisorsin eachjurisdictionmay chooseto outlineexceptionalcircumstancesthat wouldqualify ashardship, under whichtheexceptional term deposit could be withdrawnby thedepositor withoutchangingthe treatment of theentire pool of deposits.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  56. 56. 56Such reasonscould include, but arenot limitedto, supervisoryconcernsthat depositorswouldwithdrawtermdepositsinasimilar fashionasretaildemanddepositsduring eithernormal orstresstimes,concernthat banksmay repay such depositsearlyin stressed timesfor reputationalreasons,or thepresenceof unintendedincentiveson banksto imposematerial penaltieson consumersif depositsare withdrawnearly.In thesecasessupervisorswouldassessa higher run-off againstall orsomeof such deposits.(ii) Unsecured wholesalefunding run-off85.For thepurposesof the LCR, "unsecured wholesalefunding‖ isdefinedasthoseliabilitiesand general obligationsthat are raised fromnon-natural persons(ie legal entities, includingsole proprietorshipsandpartnerships)and arenot collateralisedby legal rightsto specificallydesignatedassetsownedby the borrowinginstitution in thecaseofbankruptcy, insolvency, liquidationor resolution.Obligationsrelated toderivativecontractsare explicitlyexcludedfromthisdefinition.86.Thewholesalefunding includedin theLCR is definedasall fundingthat is callablewithinthe LCR‘s horizon of 30days or that hasitsearliestpossiblecontractual maturitydate situated withinthis horizon (such asmaturing term depositsand unsecured debt securities)aswell asfundingwith an undeterminedmaturity.This should includeall funding withoptionsthat areexercisableat theinvestor‘sdiscretionwithinthe 30 calendar day horizon.For fundingwithoptionsexercisableat thebank‘sdiscretion, supervisorsshould takeintoaccount reputational factorsthat may limit a banksabilitynot to exercisetheoption.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  57. 57. 57In particular, wherethemarket expectscertain liabilitiestobe redeemedbeforetheir legal final maturitydate, banks and supervisorsshouldassume such behaviour for the purposeof the LCR and includetheseliabilitiesasoutflows.87.Wholesalefunding that is callableby thefundsprovider subject toacontractuallydefined and bindingnoticeperiod surpassingthe 30-dayhorizon is not included.88.For thepurposesof the LCR, unsecuredwholesalefundingis to becategorisedasdetailedbelow,basedon theassumed sensitivityof thefundsproviderstotherate offered and the credit qualityand solvencyoftheborrowingbank.This is determined by the type of fundsprovidersand their level ofsophistication, aswell astheir operational relationshipswiththe bank.Therun-off ratesfor thescenario are listedfor each category.(a) Unsecured wholesalefunding provided by small businesscustomers: 5%, 10% and Higher89.Unsecuredwholesalefunding provided by small businesscustomersistreatedthesamewayasretail depositsforthepurposesofthisstandard,effectivelydistinguishingbetweena "stable" portion of fundingprovidedby small businesscustomersand different bucketsof lessstablefundingdefinedby eachjurisdiction.Thesame bucket definitionsand associated run-off factorsapply asforretail deposits.90.Thiscategoryconsistsof depositsand other extensionsof fundsmadebynonfinancial small businesscustomers.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  58. 58. 58―Smallbusinesscustomers‖are definedin linewiththe definitionofloansextended to small businessesin paragraph 231of theBasel IIframeworkthat are managed asretail exposuresand are generallyconsideredashavingsimilarliquidityrisk characteristicstoretailaccountsprovided the total aggregated funding raised from onesmall businesscustomer is lessthan €1million (on a consolidated basiswhereapplicable).91.Where a bank doesnot have anyexposure toa small businesscustomerthat wouldenableit tousethedefinitionunderparagraph231of the BaselII Framework, the bank may includesuch a deposit in thiscategoryprovided that the total aggregatefunding raisedfrom thecustomer is lessthan €1million (on a consolidatedbasiswhereapplicable) and thedepositis managed asa retail deposit.This meansthat thebank treatssuch depositsin itsinternal riskmanagement systemsconsistentlyover time and in the same manner asother retail deposits, and that the deposits are not individuallymanagedin a waycomparableto larger corporatedeposits.92.Term depositsfrom small businesscustomersshould be treatedinaccordancewiththetreatment for term retail deposits asoutlined inparagraph 82, 83, and 84.(b) Operational deposits generated by clearing, custody andcash management activities: 25%93. Certain activitieslead to financial and non-financial customersneedingto place, or leave, depositswith a bank in order tofacilitate theiraccessand ability tousepayment and settlement systemsand otherwisemake payments.Thesefundsmay receivea 25% run-off factor onlyif thecustomer hasasubstantivedependencywiththe bank and thedeposit is required forsuch activities.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  59. 59. 59Supervisoryapproval wouldhavetobe giventoensure that banksutilisingthistreatment actuallyare conductingthese operationalactivitiesat the level indicated.Supervisorsmay choosenot to permit banks toutilise the operationaldeposit runoff rates in caseswhere, for example, a significant portion ofoperational depositsare provided by a small proportion of customers(ieconcentration risk).94.Qualifying activities in this context refer toclearing, custodyor cashmanagement activitiesthat meet the followingcriteria:- Thecustomer is reliant on the bank toperform theseservicesasanindependent third party intermediary in order tofulfil its normalbankingactivitiesover the next 30 days.For example,thisconditionwouldnot bemet if thebank isawarethatthe customer hasadequate back-up arrangements.- Theseservicesmust beprovidedunderalegallybindingagreement toinstitutional customers.- Theterminationof suchagreementsshall besubject eithertoanoticeperiod of at least 30days or significant switchingcosts(suchasthoserelatedtotransaction, informationtechnology, earlytermination orlegalcosts)tobebornebythecustomer if theoperationaldepositsaremovedbefore30days.94.Qualifyingoperationaldepositsgeneratedbysuchan activityareoneswhere:- Thedepositsare by-productsof the underlying servicesprovidedbythebanking organisation and not sought out in the wholesalemarketin thesoleinterest of offeringinterest income.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  60. 60. 60- Thedepositsare held in specificallydesignated accountsand pricedwithout givingan economicincentivetothe customer (not limitedtopaying market interest rates) to leaveanyexcessfundson theseaccounts.In the casethat interest ratesin a jurisdictionare closetozero, itwouldbe expectedthat such accountsare noninterest bearing.Banks should be particularlyawarethat during prolongedperiodsoflowinterest rates,excessbalances(asdefinedbelow) could besignificant.96.Any excessbalancesthat could be withdrawnand wouldstill leaveenough fundsto fulfil these clearing, custody and cash managementactivitiesdo not qualify for the25% factor.In other words,onlythat part of the deposit balancewith theserviceproviderthat isproventoserveacustomer‘soperationalneedscanqualifyasstable.Excessbalancesshould be treated in theappropriatecategoryfornon-operational deposits.If banks areunable todetermine the amount of the excessbalance,thentheentire deposit should be assumed tobe excessto requirementsand, therefore, considerednon-operational.97.Banks must determinethemethodology for identifying excessdepositsthat are excluded from this treatment.This assessment should be conductedat a sufficientlygranular level toadequatelyassesstherisk of withdrawalin an idiosyncratic stress.Themethodology should take intoaccount relevant factorssuch asthelikelihoodthat wholesalecustomershave aboveaveragebalancesinBasel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  61. 61. 61advanceof specific payment needs, and consider appropriateindicators(egratios of account balancesto payment or settlement volumesor toassetsunder custody) toidentify those customersthat are not activelymanagingaccount balancesefficiently.98.Operational depositswouldreceivea 0% inflowassumptionfor thedepositingbank given that thesedepositsare required for operationalreasons, and arethereforenot availabletothedepositingbank torepayother outflows.99.Notwithstandingtheseoperational categories, if thedeposit underconsiderationarisesout of correspondent banking or from the provisionof prime brokerage services,it will betreated asif there werenooperational activityfor the purpose of determining run-off factors.42100.Thefollowingparagraphsdescribethe typesof activitiesthat maygenerateoperational deposits.Abank should assesswhetherthe presenceof such an activitydoesindeedgeneratean operational deposit asnot all such activitiesqualifyduetodifferencesin customer dependency, activityand practices.101.Aclearingrelationship, in this context, refers toa servicearrangement that enablescustomersto transfer funds(or securities)indirectlythrough direct participantsin domestic settlement systems tofinal recipients.Such servicesare limitedtothe followingactivities:transmission, reconciliationand confirmation of payment orders;daylight overdraft, overnight financingand maintenanceof post-settlement balances;anddetermination of intra-dayand finalsettlement positions.102.Acustodyrelationship, in this context, refers tothe provision ofsafekeeping, reporting, processingof assetsor thefacilitation of theoperational and administrativeelementsof related activitieson behalf ofcustomersin the processof their transacting and retainingfinancialassets.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  62. 62. 62Such servicesare limitedtothesettlement of securitiestransactions,thetransfer of contractual payments, the processingof collateral, and theprovision of custodyrelated cashmanagement services.Also includedarethereceipt of dividendsand other income, clientsubscriptionsand redemptions.Custodial servicescan furthermore extend toasset and corporate trustservicing, treasury, escrow,fundstransfer, stock transfer and agencyservices, includingpayment and settlement services(excludingcorrespondent banking), and depositoryreceipts.103.Acashmanagement relationship, in this context, refers to theprovision of cash management and related servicesto customers.Cash management services,in thiscontext, referstothoseproductsandservicesprovided to a customer to manageitscash flows, assetsandliabilities,and conduct financial transactionsnecessarytothecustomer‘songoing operations.Such servicesare limitedtopayment remittance, collectionandaggregation of funds, payroll administration, and control over thedisbursement of funds.104.Theportion of the operational depositsgeneratedbyclearing, custodyand cashmanagement activitiesthat is fullycoveredby deposit insurancecan receivethesame treatment as―stable‖ retaildeposits(c) Treatment of depositsin institutional networks ofcooperative banks: 25% or 100%105.An institutional networkof cooperative(or otherwisenamed) banksis a group of legallyautonomousbankswith a statutoryframeworkofcooperation withcommon strategic focusand brand wherespecificBasel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  63. 63. 63functionsare performed by central institutionsor specializedserviceproviders.A25% run-off rate can be given to the amount of depositsof memberinstitutionswiththecentral institution or specialisedcentral serviceprovidersthat areplaced(a)dueto statutoryminimum deposit requirements,whichare registeredat regulatorsor(b)in thecontext of common tasksharingand legal, statutory orcontractual arrangementssolong asboth the bank that hasreceivedthemoniesand the bank that hasdepositedparticipatein the sameinstitutional network‘smutual protectionschemeagainst illiquidityandinsolvencyof itsmembers.As withother operational deposits, thesedepositswould receivea 0%inflowassumption for thedepositingbank, asthesefundsare consideredtoremain withthe centralisedinstitution.106.Supervisoryapproval wouldhave tobe given toensure that banksutilisingthistreatment actuallyare the central institutionor a centralserviceprovider of such a cooperative(or otherwisenamed) network.Correspondent bankingactivitieswouldnot beincludedin thistreatmentandwouldreceivea100%outflowtreatment, aswouldfundsplacedat thecentral institutionsor specialised service providersfor anyother reasonother than thoseoutlined in (a) and (b) in the paragraph above, or foroperational functionsof clearing, custody, or cash management asoutlined in paragraphs101-103.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  64. 64. 64(d) Unsecured wholesalefunding provided by non-financialcorporatesand sovereigns, central banks, multilateraldevelopment banks, and PSEs: 20% or 40%107.This categorycomprisesall deposits and other extensionsofunsecuredfunding from non-financial corporate customers(that are notcategorisedassmall businesscustomers) and (both domestic and foreign)sovereign,centralbank, multilateraldevelopment bank, andPSEcustomersthat are not specificallyheld for operationalpurposes(asdefinedabove).Therun-off factor for these fundsis40%, unlessthecriteria inparagraph 108are met.108.Unsecured wholesalefunding providedby non-financial corporatecustomers,sovereigns,central banks, multilateraldevelopmentbanks, and PSEswithout operational relationshipscan receivea 20%run-offfactor if the entire amount of thedeposit is fully covered by aneffectivedeposit insurancescheme or by a public guaranteethatprovidesequivalent protection.(e) Unsecured wholesalefunding provided by other legal entitycustomers: 100%109.This categoryconsistsof all depositsand other fundingfrom otherinstitutions(includingbanks,securitiesfirms,insurancecompanies,etc), fiduciaries,beneficiaries,conduitsand specialpurposevehicles,affiliatedentitiesof thebank and other entitiesthat are notspecificallyheld for operational purposes(asdefinedabove) and notincluded in theprior threecategories.Therun-off factor for these fundsis100%.110.All notes,bondsand other debt securitiesissued by the bank areincludedin this categoryregardlessof theholder, unlessthebond is soldBasel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  65. 65. 65exclusivelyin the retail market and held in retail accounts(includingsmall businesscustomer accountstreated asretail per paragraphs89-91), in whichcasethe instrumentscan be treatedin the appropriate retailor small businesscustomer deposit category.Tobe treated in thismanner, it isnot sufficient that the debt instrumentsare specificallydesignedand marketed to retail or small businesscustomers.Rather there should be limitationsplaced suchthat thoseinstrumentscannot be bought and held by partiesother than retail or small businesscustomers.111.Customer cashbalancesarisingfrom the provision of primebrokerage services,includingbut not limitedto the casharisingfromprime brokerageservicesasidentifiedin paragraph99, should beconsideredseparatefrom anyrequired segregatedbalancesrelatedtoclient protection regimes imposed bynational regulations, and shouldnotbenettedagainst other customerexposuresincludedin thisstandard.Theseoffsettingbalancesheld in segregatedaccountsare treated asinflowsin paragraph 154and should be excluded from thestock ofHQLA.(iii) Secured funding run-off112.For the purposesof thisstandard, ―securedfunding‖ is defined asthoseliabilitiesand general obligationsthat are collateralisedby legalrightstospecificallydesignatedassetsownedby the borrowinginstitution in the caseof bankruptcy, insolvency, liquidationorresolution.113.Lossof secured fundingon short-term financingtransactions:In thisscenario, the ability tocontinueto transact repurchase,reverserepurchaseand other securitiesfinancingtransactionsislimitedtotransactionsbacked by HQLAor withthebank‘sdomesticBasel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  66. 66. 66sovereign, PSE or central bank.Collateral swapsshould be treated asrepurchaseor reverserepurchaseagreements, asshould any other transactionwitha similar form.Additionally, collateral lent to thebank‘scustomersto effect shortpositionsshould betreated asa form of secured funding.For thescenario, a bank should applythefollowingfactorstoalloutstandingsecuredfunding transactionswithmaturitieswithin the 30calendar daystresshorizon, includingcustomer short positionsthat donot have a specifiedcontractual maturity.Theamount of outflowis calculatedbased on the amount of fundsraisedthrough thetransaction, and not thevalue of theunderlying collateral.114. Due to the high-qualityof Level 1assets,noreduction in fundingavailability against these assetsisassumed to occur.Moreover,noreduction in funding availability is expectedfor anymaturing securedfunding transactionswith thebank‘sdomesticcentralbank.Areduction in fundingavailability will be assignedtomaturingtransactionsbacked by Level 2 assetsequivalent to the requiredhaircuts.A25% factor isappliedfor maturing secured funding transactionswiththebank‘sdomestic sovereign, multilateral development banks, ordomesticPSEsthat have a 20% or lowerrisk weight, whenthetransactionsare backed by assetsother thanLevel 1or Level 2Aassets,inrecognition that theseentitiesare unlikelyto withdraw secured fundingfrom banks in a time of market-widestress.This, however, givescredit only for outstandingsecured fundingtransactions,and not for unused collateralor merelythe capacitytoborrow.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  67. 67. 67115. For all other maturing transactionstherun-off factor is100%, includingtransactionswherea bank hassatisfiedcustomers‘short positionswithitsown longinventory.Thetablebelow summarisesthe applicablestandards:(iv) Additional requirements116. Derivativescashoutflows:thesum of all net cashoutflowsshouldreceivea 100% factor.Banks should calculate, in accordancewiththeir existing valuationmethodologies, expected contractual derivativecashinflowsandoutflows.Cash flowsmay be calculatedon a net basis(ie inflowscan offsetoutflows)by counterparty, onlywherea valid master nettingagreementexists.Banks should excludefrom such calculationsthoseliquidityrequirementsthat wouldresult from increased collateral needsduetomarket valuemovementsor fallsin value of collateral posted.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com

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