Basel III - Liquidity ratios
February 13, 2013
Views or opinions in this presentation are solely
those of the presenter and do not necessarily
represent those of ICICI Bank Limited
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Background
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
Basel Committee of Banking Supervision (BCBS) had
proposed two liquidity ratios in December 2009

Liquidity coverage ratio (LCR)
 High quality liquid assets available to meet net cash
outflows for a 30 day time horizon under stress scenario

Net stable funding ratio (NSFR)
 Requires minimum stable funding over a 1 year horizon
based on liquidity risk factors assigned to assets and offbalance sheet liquidity exposure

Quantitative Impact Study (QIS) to analyse impact of liquidity
ratios started from March 2011
Liquidity coverage ratio (LCR)

Definition:
Stock of high quality liquid assets
Net cash outflows over a 30 day period

Minimum level of 60% to be maintained by 2015 with a 10%
increase every year till 100% in 2019

Both systemic shocks and institution specific stress
considered to arrive at net cash outflows
Liquid assets
Net cash outflows
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Net stable funding ratio (NSFR)

Definition
Available amount of stable funding
Required amount of stable funding

Minimum level of 100% to be maintained by 2018

To lead to structural change in liquidity risk profiles
towards longer term stable funding
Available stable funding
Required stable funding
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Key challenges
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
Treatment of CRR/SLR as a part of liquid asset
 Significant portion of CRR/SLR not allowed to be
considered as liquid assets

Customer term deposits have premature withdrawal
 Due to premature withdrawal option, higher outflows are
considered in LCR computation and lower stable
funding factor in NSFR computation

Lower proportion of insured deposits
 Insured deposits forms small portion of the total deposit
base, leading to higher outflows in the LCR computation
RBI - Liquidity Guidelines
Issued on November 7, 2012
Governance of liquidity risk
management
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
Board should decide the strategy, policies & procedures
to manage liquidity risk

Understand the nature of liquidity risk of the bank,
including branches, subsidiaries & associates

Liquidity risk management policy to cover material
subsidiaries, JVs & associates
Management of liquidity risk (1/2)
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
Banks should have sound process to identify, measure,
monitor & mitigate liquidity risk

Extend liquidity gap limits currently applicable for
domestic-INR gaps to overseas operations (country-wise)

Liquidity gap statement for overseas branches to be
prepared daily

Recommended to be extended to consolidated domestic
operations (INR & FC) & consolidated Bank operations
Management of liquidity risk (2/2)
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
Short-term dynamic liquidity gap statement to be extended
to overseas branch operations (jurisdiction wise and
overall)

Assumptions used in cash flow projections should be
transparent to the Board/Risk Committee and reviewed
periodically

Set of illustrative liquidity ratios provided for domestic
operations and also for major currencies viz. USD, GBP,
EUR and JPY.

Ratios are only illustrative and banks can also use other
measures/ratios
Overseas operations of Indian bank’s
branches & subsidiaries
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
Banks should provide detailed procedures & guidelines for
their overseas branches / subsidiaries to manage their
operational liquidity on an ongoing basis

Monitor two ratios for overseas operations
(consolidated & separately for currencies >10% of
consolidated overseas balance sheet)
 Long & medium term resources/long & medium term
assets
 Long term resources to long term assets ratios
Stress testing
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
Conduct stress tests on various short term & protracted
bank specific & market-wide stress scenarios
 Individually & in combination

Stress test results should assist bank’s contingent funding
planning and form strategy to deal liquidity stress situation

Risk tolerance may also be expressed in terms of minimum
survival horizons
Contingency funding plan (CFP)
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
Banks to formulate CFP to respond to severe disruptions,
which might affect the bank’s ability to fund some or all of its
activities in a timely manner and at a reasonable cost

Contingency plans must be tested regularly to ensure their
effectiveness and operational feasibility

To be reviewed by the Board at least on an annual basis
Collateral position management
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
Maintain sufficient collateral for expected & unexpected
borrowings,
increased
margin
requirements,
and
pledging/delivery of additional intra-day collateral in case of
operational/liquidity disruption

Have systems & procedures in place to assess/compute
collateral requirements, pledged assets & unencumbered
assets
Intra-day liquidity position management
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
Banks to monitor intra-day liquidity requirements

Have policies, procedures and systems to support intra-day
liquidity risk management in all financial markets and
currencies in which it has significant flows

Develop and adopt an intra-day liquidity strategy to monitor
and measure expected daily gross liquidity flows
Thank you
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