LCR and NSFR ARUSHA

IMPLEMENTATION OF BASEL II/III

LIQUIDITY COVERAGE RATIO (LCR) AND

NET STABLE FUNDING RATIO (NSFR)
Directorate of Financial Sector Supervision

2/9/2024 1
Contents
 Introduction
 Liquidity Coverage Ratio (LCR)
 Net Stable Funding Ratio (NSFR)
2/9/2024 2
Introduction
 This framework presents the liquidity portion of the Basel

Committee’s reforms to strengthen global capital and
liquidity regulations with the goal of promoting a more
resilient banking sector.
 The objective - to improve the banking sector’s ability to

absorb shocks arising from financial and economic stress,
whatever the source, thus reducing the risk of spillover
from the financial sector to the real economy.
2/9/2024 3
Introduction
 The Committee has strengthened its liquidity framework

by developing two minimum standards for funding
liquidity.
 LCR - to promote short-term resilience of a bank’s liquidity risk

profile by ensuring that it has sufficient high-quality liquid assets
to survive a significant stress scenario lasting for one month.
 NSFR - to promote resilience over a longer time horizon by

creating additional incentives for banks to fund their activities
with more stable sources of funding on an ongoing basis. (1 year
horizon)
2/9/2024 4
Liquidity Coverage Ratio (LCR)
 Banks to maintain an adequate level of unencumbered,

High Quality Liquid Assets (HQLA) that can be converted
into cash to meet its liquidity needs for a 30 calendar day
time horizon under a significantly severe liquidity stress
scenario.
 At a minimum, the stock of liquid assets should enable

the bank to survive until Day 30 of the stress scenario, by
which time it is assumed that appropriate corrective
actions can be taken by management and/or supervisors.
2/9/2024 5
LCR = Stock of high-quality liquid assets ≥ 100%

Total net cash outflows over the next 30 calendar days
Stress Scenario:
 The run-off of a proportion of retail deposits.
 A partial loss of unsecured wholesale funding capacity.
 A partial loss of secured, short-term financing with certain collateral.
 Additional contractual outflows that would arise from a downgrade
in the bank’s public credit rating.
 Increases in market volatilities.
 Unscheduled draws on committed but unused credit.
 Potential need for the bank to buy back debt.
2/9/2024 6
 Fundamental characteristics of HQLA

 Low credit and market risk.
 Can be easily and accurately valued.
 Low correlation with risky assets.
 Listed on a regulated exchange, to ensure greater
transparency.
2/9/2024 7
 Market characteristics of HQLA

 Active and sizable market.
 Presence of committed market makers.
 Low market concentration.
 Flight to quality
 HQLA should ideally be eligible at central banks

for intraday liquidity needs and overnight
liquidity facilities.
2/9/2024 8
 There are two categories of assets that can be

included in the HQLA.
 Assets to be included in each category are those

that the bank is holding on the first day of the
stress period.
 Level 1 assets - can be included without limit.
 Level 2 assets - can only comprise up to 40% of

the HQLA.
2/9/2024 9
 Level 1 assets are not subject to a haircut but

national supervisors may wish to require haircuts
at their discretion.
 Level 1 assets are limited to:
 cash;
 central bank reserves, to the extent that these reserves
can be drawn down in times of stress; and
 marketable securities representing claims on or claims
guaranteed by sovereigns, central banks, IMF, EU
multilateral banks.
2/9/2024 10
 Level 2 assets can be included in the stock of

liquid assets, provided that they comprise no
more than 40% of the overall stock after haircuts.
 A minimum 15% haircut to be applied.
 Level 2 assets are limited to:
 Marketable securities (meeting certain conditions).
 Corporate bonds and covered bonds (meeting certain
conditions).
2/9/2024 11
 The term total net cash outflows = the total expected cash
outflows minus total expected cash inflows in the specified
stress scenario for the subsequent 30 calendar days.
 Total expected cash outflows = outstanding balances of
various categories of liabilities x the rates at which they
are expected to run off or be drawn down.
 Total expected cash inflows = outstanding balances of
various categories of contractual receivables x the rates at
which they are expected to flow in under the scenario,
cupped at 75% of total expected cash outflows.
2/9/2024 12
Total net cash outflows over the next 30 calendar days =

outflows – Min {inflows; 75% of outflows}
 Cash outflows:
 Stable retail deposits (run-off rate = 5% and higher)
 Less stable retail deposits (run-off rates = 10% and higher)
 Unsecured wholesale funding provided by small business
customers (5%, 10% and higher)
 Unsecured wholesale funding with operational relationships: 25%
2/9/2024 13
 Cash outflows:
 Unsecured wholesale funding provided by non-financial
corporates and sovereigns, central banks and public sector
entities: 75%
 Unsecured wholesale funding provided by other legal entity
customers: 100%
 Secured funding run-off (0%, 15%, 25%, 100% depending on type
of collateral)
 Derivatives payables (100% run-off)
 Drawdowns on committed credit and liquidity facilities (5%, 10%,
100%)
2/9/2024 14
 Cash inflows:
 Reverse repos and securities borrowing (5%, 10%, 15%, 100%
depending assumptions)
 Lines of credit; 0%
 Retail and small business customer inflows: 50%
 Wholesale inflows from financial institution counterparties: 100%
 Wholesale inflows from non-financial counterparties: 50%
 Operational deposits: 0%
 Other cash inflows
2/9/2024 15
LCR
 Stock of high-quality liquid assets (HQLA):

 In the case of Tanzania, Level I assets include cash, balances with
Bank of Tanzania and Government securities.
 Government securities which matures within a year will be
included in HQLA as Level 1 assets without limit but with a
discount of 5%.
 Government securities with maturity of more than a year to be
included in HQLA as Level 1 assets without limit, but with a
discount of 20%.
 Level 2 assets can only comprise of up to 40 percent of the stock
of HQLA. For the time being, there are no assets falling under this
category.
2/9/2024 16
LCR
 Cash outflows:
 Stable (insured) deposits - run-off rate of 5% as per Basel III.
 Less stable deposits - run-off rate of 15% (Basel III run-off rate of 10%).
 Demand deposits, savings deposits and term deposits maturing in 30
days (other corporates) - run-off rate of 40% as proposed in the Basel III.
 Undrawn balances of loans and unexpired overdrafts - a run-off rate of
10% for simplicity. (Basel III proposes a run-off rate of 5% for retail and
small business clients and 30% for corporates.
 Other contingent funding liabilities (such as guarantees and letters of
credit) - a run-off rate of 5% as per Basel III.
 All other cash outflows - a run-off rate of 100% as proposed in the Basel
III
2/9/2024 17
LCR
 Cash inflows:
 Loans and advances (maturing within 30 days) - a run-off rate
of 50% as proposed in the Basel III LCR framework (Margin
lending backed by all other collateral)
 All other cash inflows have been assigned a run-off rate of 100%
as proposed in the Basel III LCR framework.
 Frequency of calculation and reporting – start with

monthly.
2/9/2024 18
Net Stable Funding Ratio (NSFR)
 NSFR establishes a minimum acceptable amount of stable

funding based on the liquidity characteristics of an
institution’s assets and activities over a one year horizon.
 NSFR is structured to ensure that long term assets are
funded with at least a minimum amount of stable
liabilities in relation to their liquidity risk profiles.
 NSFR approach offsets incentives for banks to fund their
stock of liquid assets with short-term funds that mature
just outside the 30-day horizon.
2/9/2024 19
Available amount of stable funding › 100%

Required amount of stable funding
20
2/9/2024
Available Stable Fund Category Factor

Total Capital 100%
Preferred stock, maturity ≥ one year; 100%
Liabilities with effective maturities ≥ one year; 100%
Portion of stable non-maturity deposits 90%
Portion of less stable non-maturity deposits 80%
Portion of wholesale funding 50%
Other liabilities 0%
21
2/9/2024
 Required Stable Funding (RSF):

 Sum of the value of the assets held and funded by the
bank x a specific RSF factor assigned to each particular
asset type, added to the amount of OBS activity x its
associated RSF factor.
 The RSF factor applied is the amount of that item that
supervisors believe should be supported with stable
funding.
2/9/2024 22
BASEL III LIQUIDITY RISK FRAMEWORK
Thank You For Listening
2/9/2024 23

LCR and NSFR ARUSHA

Uploaded by

Copyright:

Available Formats

LCR and NSFR ARUSHA

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

LCR and NSFR ARUSHA

Uploaded by

Copyright:

Available Formats

IMPLEMENTATION OF BASEL II/III

LIQUIDITY COVERAGE RATIO (LCR) AND

Directorate of Financial Sector Supervision

 Liquidity Coverage Ratio (LCR)

 Net Stable Funding Ratio (NSFR)

 This framework presents the liquidity portion of the Basel

 The objective - to improve the banking sector’s ability to

 The Committee has strengthened its liquidity framework

 LCR - to promote short-term resilience of a bank’s liquidity risk

 NSFR - to promote resilience over a longer time horizon by

 Banks to maintain an adequate level of unencumbered,

 At a minimum, the stock of liquid assets should enable

LCR = Stock of high-quality liquid assets ≥ 100%

 Fundamental characteristics of HQLA

 Market characteristics of HQLA

 HQLA should ideally be eligible at central banks

 There are two categories of assets that can be

 Assets to be included in each category are those

 Level 1 assets - can be included without limit.

 Level 2 assets - can only comprise up to 40% of

 Level 1 assets are not subject to a haircut but

 Level 2 assets can be included in the stock of

Total net cash outflows over the next 30 calendar days =

 Stock of high-quality liquid assets (HQLA):

 Frequency of calculation and reporting – start with

 NSFR establishes a minimum acceptable amount of stable

Available amount of stable funding › 100%

Available Stable Fund Category Factor

 Required Stable Funding (RSF):

Thank You For Listening

You might also like