Blog

Sun, 06 January 2013
Written by Alvin Abraham

The Basel committee today (6th Jan 2013), watered down the Basel III liquidity coverage ratio (LCR) requirement.  The summary of the key changes impacting small and medium-sized banks are listed below:

 

1)      The LCR will be phased-in

a.       Minimum LCR in 2015: 60%

b.      Increase by 10% every year to reach 100% in 2019

 

2)      The list of items that can be considered as high quality liquid assets (i.e., liquid asset buffer) has been extended and this includes:

a.       corporate bonds rated A+ to BBB- (with 50% haircut)

b.      unencumbered securities (with 50% haircut)

c.       These additional items have be capped at 15% of the high quality liquid assets

 

3)      Outflow changes

a.       Insured retail deposits (reduced from 5% to 3%)

b.      Insured non-financial corporates, government, central bank and public sector entities deposits (reduced from 40% to 20%)

c.       Non-financial corporate deposits, government, central bank and public sector entities deposits (reduced from 75% to 40%)

d.      Committed liquidity facilities to non-financial corporates (reduced from 100% to 30%)

e.      Trade Finance (0% to 5% outflow)

 

 
 

                                      Stock of high quality liquid assets

LCR =       ------------------------------------------------------------------

                Total net cash outflows over the next 30 calendar days

 

 

 

 

 

 

Please refer to the link Risk Management -- Basel III Liquidity for more details about the Basel III liquidity requirements.

 

Thu, 03 November 2011
Written by Alvin Abraham

FSA's new liquidity rules came into effect for Sterling Stock Banks from 1 June 2010 and for Mismatch banks from 1 October 2010.  The new rules require banks to hold a stock of high quality liquid asset buffer (LAB), which can be used to meet the firm's obligations under a stress scenario. 

A few of the sterling stock banks have been publishing their liquid asset buffer holding (that meets the FSA's rules) in their interim and annual reports. Please find below a summary of the LAB and other Basel III liquidity measures for these banks:-

 

        

Group

Description

30th June 2010

(in £ billions)

31st Dec 2010

(in £ billions)

30th June 2011

(in £ billions)

 

 

Barclays

Assets

1,580

1,480

1,490

Liquid asset buffer (LAB)

146

140

132*

LAB/Assets

9.2%

9.4%

8.8%

Liquidity Coverage Ratio (LCR)

n/a

80%

86%

Net Stable Funding Ratio (NSFR)

n/a

94%

96%

 

RBS

Assets

1,580

1,410

1,440

Liquid asset buffer (LAB) **

137

154

155

LAB/Assets

8.6%

10.9%

10.7%

Net Stable Funding Ratio (NSFR)

n/a

101%

97%

 

Lloyds

Assets

1,000

991

978

Liquid asset buffer (LAB)

84

67

101

LAB/Assets

8.4%

6.7%

10.3%

Liquidity Coverage Ratio (LCR)

n/a

71%

n/a

Net Stable Funding Ratio (NSFR)

n/a

88%

n/a

 

Santander  (UK)

Assets

289

303

313

Liquid asset buffer (LAB)

31

40

44

LAB/Assets

10.7%

13.2%

14%

* This reduction was the result of managing down short term deposits (Barclay's interim results)

** approximate

 

The size of the LAB is not a generic percentage or fixed number for all banks. Each bank has to calculate its liquid buffer requirement based on the bank's Individual Liquidity Guidance (ILG) and glide-path (calibration parameter) provided by the regulators. The information above is only provided to give an overview about the liquid asset buffer requirement and other Basel III parameters for some of the large UK banks.

 

For more information about Liquidity Risk Management, please click here

 

Mon, 11 April 2011
Written by Alvin Abraham

As part of the new liquidity guidelines (PS09/16), the FSA had published a Liquidity Metric Monitor (LMM) that outlines a wide range of mismatch gaps that can be used to monitor liquidity risk.  The gaps listed in the LMM are comprehensive in nature and can be used by firms to monitor and manage liquidity risk.

Inflow (assets) and Outflow (liabilities) mismatch “GAPs” across the various time-bands can be used to identify potential liquidity risks and to analyse the impact of maturity transformation on the firm’s liquidity. The inflows (assets) and outflows (liabilities) are considered on a contractual basis and conservative behavioural and stress assumptions have been applied to arrive at the various mismatch GAPs.

The mismatch GAPs are analysed based on the time-bands listed in the table below:-

 

<=2 weeks

>2 weeks

and

<=1month

> 1 month

and

<=3months

>3 months

and

<=6months

>6months

and

<=1 year

>1 year

and

<=2years

>2 years

and

<=5years

>5 years

 

The summary of the GAPs considered in the LMM are listed below:-

 

1)      GAP1: Wholesale Refinancing Gap (excluding lending to group and non-credit institutions)

 

2)      GAP2: Wholesale Refinancing Gap after sale of highly liquid collateral (i.e., GAP 1 + sale of highly liquid collaterals)

 

3)      GAP3: Wholesale Refinancing Gap after sale of highly liquid collateral (i.e., GAP 2 + sale of high quality collaterals)

 

4)      GAP4: Overall Refinancing Gap including Group, Retail & Corporate Banking flows and Lower Quality Collateral (i.e., GAP3 + Group, Retail & Corporate Banking flows and Lower Quality Collateral)

 

5)      GAP5: Overall Refinancing Gap plus withdrawable stress  (i.e., GAP4 + callable stress)

 

6)      GAP6: Overall Refinancing Gap plus withdrawable stress  plus off-balance sheet stress (i.e., GAP5 + off-balance sheet stress)

 

7)      GAP7: Impact of downgrade triggers (i.e., GAP6 + impact of 2 notches downgrade )

 

A trend analysis of the mismatch GAPs in conjunction with the firm’s risk appetite can be a useful tool to monitor, track and manage liquidity risk. It can also serve as a guide to set internal limits and assist in liquidity pricing.

 

Please refer to the article on Liquidity Risk Management - Mismatch GAPs for more details.

Mon, 13 December 2010
Written by Alvin Abraham

Once the liquidity buffer requirement is calculated, firms must make plans to purchase eligible liquid assets based on their specific glide-path and Internal Liquidity Adequacy Assessment (ILAA).

To meet the regulatory requirements, firms must only include assets from the options provided below:-

 

1) high quality debt securities issued by a central government or central bank

 

  Only securities issued by the following central government or central banks are eligible:-

 

a) central government or central bank of an EEA State; or

b) central government or central bank of Canada, Australia, Japan, Switzerland or USA

 

   Additional conditions:-

 

The securities must also satisfy the following conditions:-

1) At least two External Credit Assessment Institutions (ECAI) must have accessed the central bank or government in question as having a credit rating associated with credit quality step1 (as listed in the table below); and

 

Fitch's assessment  Moody's assessment S&P's assessment DBRS's assessment
AAA to AA- Aaa to AA3 AAA to AA- AAA to AAL

 

2)  denominated in the currency of the country in question; or denominated in Canadian dollars, Japanese yen, sterling, Swiss francs or United States dollars

 

 2) securities issued by a designated multilateral development bank (from the list below)

 

a) African Development Bank
b) Asian Development Bank
c) Council of Europe Development Bank
d) European Bank for Reconstruction and Development
e) European Investment Bank
f) Inter-American Development Bank
g) International Bank for Reconstruction and Development
h) International Finance Corporation
i) Islamic Development Bank; and
j) Nordic Investment Bank

 

3) reserves in the form of sight deposits with a central bank

 

Additional conditions: Please refer to the eligible central banks and additional conditions listed for the securities above

 

4) investments in a designated money market fund (ONLY for simplified ILAS firms)

 

 

Want to know more about how to calculate the liquid asset buffer (LAB) requirement? Please check out this link.