1 / 206

P a g e | 1

P a g e | 1 Inter n atio na l A s s oci a t ion of R isk a nd Co mpl i a n c e Pr o f e s s io na l s ( I A RCP) 12 0 0 G St re e t N W Su i t e 8 0 0 W a s h i ng t o n, D C 2 000 5 - 67 0 5 U SA T e l : 2 0 2 - 44 9 - 9750 www .ri s k - c ompl i ance-a ss o c i a tion . c om.

aline-baldwin
Download Presentation

P a g e | 1

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. P age |1 InternationalAssociationofRiskandComplianceProfessionals(IARCP) 1200GStreet NWSuite800Washington,DC20005-6705USATel:202-449-9750www.risk-compliance-association.com Top10riskandcompliancemanagementrelatednewsstoriesandworldeventsthat(forbetterorforworse)shapedthe week'sagenda,andwhatisnext DearMember, Thiswasadifficultweek.WehadsignificantamendmentstotheBaseliiiliquidityrules.Andweneeded206pagesforthisweeklynewsletter… Sorry,importantthingshappen. 1.TheLCRwillbeintroducedasplannedon1January2015,buttheminimumrequirementwillbeginat60%,rising inequalannualstepsof10percentagepointsto reach100%on1January2019. ThisgraduatedapproachisdesignedtoensurethattheLCRcanbeintroducedwithoutdisruption totheorderlystrengtheningofbankingsystemsortheongoingfinancingofeconomic activity. 2.Duringperiodsofstressitwouldbeentirelyappropriateforbankstousetheirstockofhighqualityliquidassets(HQLA),therebyfallingbelowtheminimum. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  2. P age |2 Bankswillbeableto countamuchwidervarietyofliquidassetstowardstheirbuffers,includingsomeequitiesandhigh-qualitymortgage-backedsecurities. EuropeanandAmericanbankingstockssurgedbecausetheywillincurmuchreducedcostsduetotheimplementationoftherelaxedrules. Banksinmany othercountieswillhavenobenefit,assupervisorshavealreadyaskedforstrictliquidityrules,andtheyarenotwillingto takeitback. Onthenegativeside,themainobjectiveofBaseliiiis to restoreinvestorconfidence.TheBaselCommitteehasdevelopedthenewframeworkasaresponsetothecrisis,andhasexplained(timeandtimeagain,everymonthsinceNovember2010)theneedforthesestrictrules. AlthoughitistruethatBaseliiiisanoverreactiontothemarketcrisis,itiswaytoolatenow to“ease”therulesandmake(clever)investorshappy thesametime. Thisissimplyaredflagformanyinvestors,leadingtotheconclusionthatbankscouldnotcomplywiththerules. IagreewiththeLiquidityCoverageratio(LCR)Baseliiiamendment,butIcannotagreewiththewayitwaspresented. Welcome totheTop10list. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  3. P age |3 BaselIII-GroupofGovernorsandHeadsofSupervisionendorsesrevisedliquiditystandardforbanks TheGroupofGovernorsandHeadsofSupervision(GHOS),theoversightbodyoftheBaselCommitteeonBankingSupervision,met todaytoconsidertheBaselCommittee'samendmentstotheLiquidityCoverageRatio(LCR)asaminimumstandard. Itunanimouslyendorsedthem. CommissionerMichelBarnier TheimpactofthelatestBaselCommitteeliquiditydevelopmentsforCapitalRequirements(CRD4)intheEU InthelightoftheGroupofGovernorsandHeadsofSupervisionmeetingandtheBaselCommitteeonBankingSupervisionpressreleasedated6January2013 BaselIII:TheLiquidity CoverageRatioandliquidityriskmonitoringtools,January2013 InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  4. P age |4 SummaryResponsesTotheCommissions’GreenPaperonShadowBanking TheEuropeanCommission'sconsultationonshadowbankingattractedhighinterestfromstakeholders. Thecommentsprovidedcoverabroadrangeofissuesandresponded toallthequestionsraisedby theEuropean CommissionGreenPaper. TheCommissionreceivedin total140contributions,ofwhich24fromPublicAuthorities;47fromregisteredorganisations;and,64fromindividualorganisations. EuropeanUnion:FinancialSectorAssessment,PreliminaryConclusionsbytheIMFStaff AFinancialSectorAssessmentProgram(FSAP)teamledbytheMonetaryandCapitalMarketsDepartmentoftheInternationalMonetaryFund(IMF)visitedtheEuropeanUnion(EU)duringNovember27–December13,2012,toconductafirst-everoverallEU-wideassessmentofthesoundnessandstabilityoftheEU’sfinancialsector(EUFSAP). EuropeanCybercrimeCentre(EC3)openson11January InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  5. P age |5 Asfrom11JanuarythenewEuropean CybercrimeCentre(EC3)willbeupandrunningto helpprotectEuropean citizensandbusinessesfromcyber-crime. EUCommissionerforHomeAffairsCeciliaMalmströmwillparticipateintheofficialopeningoftheCentreestablishedattheEuropeanPoliceOffice,EuropolintheHague(theNetherlands). SebastianvonDahlenandGoetzvonPeter Naturalcatastrophesandglobalreinsurance– exploringthelinkages Naturaldisastersresulting in significantlosseshavebecomemorefrequentinrecentdecades, with2011beingthecostliestyearinhistory. Thisfeatureexploreshowriskistransferredwithinandbeyondtheglobalinsurancesectorandassessesthefinanciallinkagesthatarisein theprocess. MortenBech,ToddKeister Ontheliquiditycoverageratio andmonetarypolicyimplementation BaselIIIintroducesthefirstglobalframeworkforbankliquidityregulation. Asmonetarypolicytypicallyinvolvestargetingtheinterestrateoninterbankloansofthemostliquidasset– central InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  6. P age |6 bankreserves– itisimportanttounderstandhow thisnewrequirementwillimpacttheefficacyofcurrentoperationalframeworks. EIOPA–RiskDashboard Sovereignrisk–aworldwithout risk-freeassets PanelcommentsbyMrPatrickHonohan,GovernoroftheCentralBankofIreland,attheBISConferenceon“Sovereignrisk–a worldwithoutrisk-freeassets”,Basel,8January2013. What’snewaboutsovereignrisk sincethecrisisbegan? Conceptually,notsomuch,Iwouldsuggest–andnothingthatcannotbefullyexplainedwithinstandardmodelsoffinance. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  7. P age |7 BaselIII-GroupofGovernorsandHeadsofSupervisionendorsesrevisedliquiditystandardforbanks 6January2013 TheGroupofGovernorsandHeadsofSupervision(GHOS),the oversightbodyoftheBaselCommitteeonBankingSupervision,mettoday to considertheBaselCommittee's amendmentstotheLiquidityCoverageRatio(LCR)asaminimum standard. Itunanimouslyendorsedthem. Today'sagreementisaclearcommitmenttoensurethatbanksholdsufficientliquidassets topreventcentralbanksbecomingthe"lenderoffirstresort". TheGHOSalsoendorsedanewCharterfortheCommittee,and discussedtheCommittee'smedium-termworkagenda. TheGHOSreaffirmedtheLCRasanessentialcomponentoftheBaselIIIreforms. ItendorsedapackageofamendmentstotheformulationoftheLCRannouncedin2010. Thepackagehasfourelements: Revisionstothedefinitionofhighqualityliquidassets(HQLA)andnetcashoutflows Atimetableforphase-inofthestandard InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  8. P age |8 Areaffirmationoftheusabilityofthestockofliquidassetsinperiodsofstress,includingduringthetransitionperiod AnagreementfortheBaselCommittee to conductfurtherworkontheinteractionbetweentheLCRandtheprovisionofcentralbankfacilities. AsummarydescriptionoftheagreedLCRisinAnnex1. ThechangestothedefinitionoftheLCR,developedandagreedbytheBaselCommitteeoverthepasttwoyears,includeanexpansionintherangeofassetseligibleasHQLAandsomerefinements totheassumedinflow andoutflow ratestobetterreflectactualexperienceintimesofstress. ThesechangesaresetoutinAnnex2. TheGHOSagreedthattheLCRshouldbesubject tophase-inarrangementswhichalignwiththosethatapply to theBaselIIIcapitaladequacyrequirements. Specifically,theLCRwillbeintroducedasplannedon1January2015,buttheminimumrequirementwillbeginat60%,risinginequalannualstepsof10percentagepointstoreach100%on1January2019. ThisgraduatedapproachisdesignedtoensurethattheLCRcanbeintroducedwithoutdisruption totheorderlystrengtheningofbankingsystemsortheongoingfinancingofeconomic activity. TheGHOSagreedthat,duringperiodsofstressitwouldbeentirelyappropriateforbanks to usetheirstockofHQLA,therebyfallingbelowtheminimum. Moreover,itistheresponsibilityofbanksupervisorstogiveguidanceonusabilityaccordingtocircumstances. TheGHOSalsoagreedtodaythat,sincedepositswithcentralbanksarethemost- indeed, insome cases,theonly-reliableformofliquidity,the InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  9. P age |9 interactionbetweentheLCRandtheprovisionofcentralbankfacilitiesiscriticallyimportant. TheCommitteewillthereforecontinuetoworkonthisissueoverthenext year. GHOSmembersendorsedtwo otherareasoffurtheranalysis. First,theCommitteewillcontinuetodevelopdisclosurerequirementsforbankliquidityandfundingprofiles. Second,theCommitteewillcontinue toexploretheuseofmarket-basedindicatorsofliquiditytosupplementtheexistingmeasuresbasedonassetclassesandcreditratings. TheGHOSdiscussedandendorsedtheBaselCommittee'smedium-termworkagenda. FollowingthesuccessfulagreementoftheLCR,theCommitteewillnowpressaheadwiththereviewoftheNetStable FundingRatio. Thisisacrucialcomponentinthenewframework,extendingthescopeofinternationalagreement tothestructureofbanks'debtliabilities. ThiswillbeapriorityfortheBaselCommitteeoverthenexttwoyears. Overthenextfewyears,theBaselCommitteewillalso: Completethe overhaulofthepolicy frameworkcurrentlyunderway Continue to strengthenthepeerreviewprogrammeestablishedin2012tomonitortheimplementationofreformsin individualjurisdictions Monitortheimpactof,andindustryresponseto,recentandproposedregulatoryreforms. During2012theCommitteehasbeenexaminingthecomparabilityofmodel-basedinternalrisk weightingsandconsideringtheappropriate InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  10. P age |10 balancebetweenthesimplicity,comparabilityandrisk sensitivityoftheregulatoryframework. TheGHOSencouragedcontinuationofthisworkin2013asamatterof priority. Furthermore,theGHOSsupportedtheCommittee'sintentiontopromoteeffectivemacro-andmicroprudentialsupervision. TheGHOSalsoendorsedanewCharterfortheBaselCommittee. ThenewChartersetsouttheCommittee'sobjectivesandkeyoperatingmodalities,andisdesignedtoimproveunderstandingoftheCommittee'sactivitiesanddecision-makingprocesses. Finally,theGHOSreiteratedtheimportanceoffull,timelyandconsistentimplementationofBaselIIIstandards. MervynKing,ChairmanoftheGHOSandGovernoroftheBankofEngland,said, "TheLiquidityCoverageRatioisakeycomponentoftheBaselIIIframework. Theagreementreachedtodayisaverysignificant achievement. Forthefirsttimeinregulatoryhistory,wehaveatrulyglobalminimum standardforbankliquidity. Importantly,introducingaphasedtimetablefortheintroductionoftheLCR,andreaffirmingthatabank'sstockofliquidassetsareusableintimesofstress,willensurethatthenewliquiditystandardwill innowayhindertheabilityoftheglobalbankingsystemtofinancearecovery." StefanIngves,ChairmanoftheBaselCommitteeandGovernoroftheSverigesRiksbank,noted: InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  11. P age |11 "TheamendmentstotheLCRaredesignedtoensurethatitprovidesasoundminimumstandardforbankliquidity -astandardthatreflectsactualexperienceduringtimesofstress. Thecompletionofthisworkwillallow theBaselCommitteeto turnitsattentiontorefiningtheothercomponentofthenewgloballiquiditystandards,theNetStableFundingRatio,whichremainssubjecttoanobservationperiodaheadofitsimplementationin 2018." Annex1 SummarydescriptionoftheLCR Topromoteshort-termresilienceofabank’sliquidityrisk profile,theBaselCommitteedevelopedtheLiquidityCoverageRatio(LCR). Thisstandardaimstoensurethatabankhas anadequatestock of unencumberedhighqualityliquidassets(HQLA)whichconsistsofcashorassetsthatcanbeconvertedintocashatlittleornolossofvalueinprivatemarketstomeetitsliquidityneedsfora30calendardayliquiditystressscenario. TheLCRhastwo components: ThevalueofthestockofHQLA Total netcashoutflowsandisexpressedas: InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  12. P age |12 High QualityLiquidAssets ThenumeratoroftheLCRisthestockofHQLA. Underthestandard,banksmustholdastockofunencumberedHQLAtocoverthetotal netcashoutflowsovera30-dayperiodundertheprescribedstressscenario. In ordertoqualifyas HQLA,assetsshouldbeliquidinmarketsduringatimeofstressand,inmostcases,beeligibleforuseincentralbankoperations. CertaintypesofassetswithinHQLAaresubjecttoarangeofhaircuts.HQLAarecomprisedofLevel1andLevel2assets. Level1assetsgenerallyincludecash,centralbankreserves,andcertainmarketablesecuritiesbackedbysovereignsandcentralbanks,amongothers. Theseassetsaretypicallyofthehighestqualityandthemostliquid,andthereisnolimitontheextenttowhichabankcanholdtheseassets tomeettheLCR. Level2assetsarecomprisedofLevel2AandLevel2Bassetsandincludecertainmarketablegovernmentsecuritiesaswellascorporatedebtsecurities,residentialmortgagebackedsecuritiesandequitiesthatmeetcertainconditions. Level2assets(comprisingLevel2AandLevel2Bassets)aretypicallyofslightlylesserqualityandmaynotinaggregateaccountformorethan40%ofabank’sstockofHQLA. Level2Bassetsmaynotaccountformorethan15%ofabank’stotalstockofHQLA. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  13. P age |13 Totalnetcashoutflows ThedenominatoroftheLCRisthetotalnetcashoutflows. Itisdefinedastotalexpectedcashoutflows,minus totalexpectedcashinflows,inthespecifiedstressscenarioforthesubsequent30calendardays. Totalexpectedcash outflowsarecalculatedbymultiplyingtheoutstandingbalancesofvarious categoriesortypesofliabilitiesand off-balancesheetcommitmentsbytheratesatwhichtheyareexpectedto runofforbedrawndown. Totalexpectedcashinflowsarecalculatedbymultiplyingtheoutstandingbalancesofvariouscategoriesofcontractualreceivablesbytheratesatwhichtheyareexpected to flow in. Totalcashinflowsaresubjecttoanaggregate capof75%oftotalexpectedcashoutflows,therebyensuringaminimumlevelofHQLAholdingsatalltimes. LiquidityCoverageRatio Thestandardrequiresthat,absentasituationoffinancialstress,thevalueoftheratiobenolowerthan100%(iethestockofHQLAshouldatleastequaltotalnetcashoutflows). BanksareexpectedtomeetthisrequirementcontinuouslyandholdastockofunencumberedHQLAasadefenceagainstthepotentialonsetofliquiditystress. Duringaperiodoffinancialstress,however,banksmayusetheirstockofHQLA,therebyfalling below100%. Important -The100%thresholdistheminimumrequirement absentaperiodoffinancialstress,andafterthephase-inarrangementsarecomplete. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  14. P age |14 • References to 100%maybeadjustedforanyphase-inarrangementsinforceataparticulartime. • Annex2 • Completesetofagreedchanges totheLiquidityCoverageRatio • HIGHQUALITYLIQUIDASSETS(HQLA) • ExpandthedefinitionofHQLAsubjecttoahigherhaircutandlimit • CorporatedebtsecuritiesratedA+ to BBB– witha50%haircut • Certainunencumberedequitiessubjectto a50%haircut • Certainresidentialmortgage-backedsecuritiesratedAAorhigherwitha25%haircut • Aggregateofadditionalassets,afterhaircuts,subjecttoa15%limitoftheHQLA • RatingrequirementonqualifyingLevel2assets • Useoflocalratingscalesandinclusionofqualifyingcommercialpaper • Usabilityoftheliquiditypool • IncorporatelanguagerelatedtotheexpectationthatbankswillusetheirpoolofHQLAduringperiodsofstress • Operationalrequirements • RefineandclarifytheoperationalrequirementsforHQLA • OperationofthecaponLevel2HQLA • Reviseandimprovetheoperationofthe cap InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  15. P age |15 • Alternativeliquidasset(ALA)framework • Developthealternativetreatmentsandincludeafourthoptionforsharia-compliantbanks • Centralbankreserves • Clarifylanguage toconfirmthatsupervisorshavenationaldiscretiontoincludeorexcluderequiredcentralbankreserves(aswellasovernightandcertaintermdeposits)asHQLAastheyconsiderappropriate • INFLOWSANDOUTFLOWS • Insureddeposits • Reduceoutflow oncertainfullyinsuredretaildepositsfrom5%to3% • Reduceoutflow onfullyinsurednon-operationaldepositsfrom • non-financialcorporates,sovereigns,centralbanksandpublicsectorentities(PSEs)from40%to20% • Non-financialcorporatedeposits • Reduce theoutflowratefor“non-operational”depositsprovidedby • non-financialcorporates,sovereigns,centralbanksandPSEsfrom75%to40% • Committedliquidityfacilitiestonon-financialcorporates • Clarifythedefinitionofliquidityfacilitiesandreducethedrawdownrateontheunusedportionofcommittedliquidityfacilities tonon-financialcorporates,sovereigns,centralbanks andPSEsfrom100%to30% • Committedbutunfundedinter-financialliquidityandcreditfacilities • Distinguishbetweeninterbankandinter-financialcreditandliquidityfacilitiesandreducetheoutflowrateontheformerfrom100%to 40%Derivatives InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  16. P age |16 • AdditionalderivativesrisksincludedintheLCRwitha100%outflow(relates to collateralsubstitution,andexcesscollateralthatthebankiscontractuallyobligatedto return/provideifrequiredbyacounterparty) • Introduceastandardisedapproachforliquidityriskrelated to marketvaluechangesinderivativespositions • Assumenetoutflow of0%forderivatives (andcommitments)thatarecontractuallysecured/collateralisedbyHQLA • Tradefinance • Includeguidancetoindicatethatalowoutflow rate(0–5%)isexpectedtoapply • Equivalenceofcentralbankoperations • Reduce theoutflowrateonmaturingsecuredfundingtransactionswithcentralbanksfrom25%to0% • Clientservicingbrokerage • Clarifythetreatmentofactivitiesrelated to clientservicingbrokerage(whichgenerallylead to anincreaseinnetoutflows) • OTHER • Rulestextclarifications • ClearerguidanceontheusabilityofHQLA,andtheappropriatesupervisoryresponse,hasbeendeveloped to ensurethatthestockofliquidassetsisavailable tobeusedwhenneeded • Anumberofclarificationstotherulestexttopromoteconsistentapplicationandreducearbitrageopportunities(egoperationaldepositsfromwholesaleclients,derivativescashflows,openmaturityloans).AlsoincorporationofpreviouslyagreedFAQ InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  17. P age |17 Internationallyagreedphase-inoftheLCR -TheminimumLCRin2015wouldbe60%andincreaseby10percentagepointsperyeartoreach100%in2019 InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  18. P age |18 • BaselCommittee onBankingSupervision(BCBS)CharterJanuary2013 • Purposeandrole • Mandate • TheBCBSistheprimaryglobalstandard-setterfortheprudentialregulationofbanksandprovidesaforumforcooperationonbankingsupervisorymatters. • Itsmandateis to strengthentheregulation,supervisionandpracticesof banksworldwidewiththepurposeofenhancingfinancialstability. • Activities • TheBCBSseeksto achieveitsmandatethroughthefollowingactivities: • Exchanginginformationondevelopmentsinthebankingsectorandfinancialmarkets,tohelpidentifycurrentoremergingrisksfortheglobalfinancialsystem; • Sharingsupervisoryissues,approachesand techniquestopromotecommonunderstandingandtoimprovecross-bordercooperation; • Establishingandpromotingglobalstandardsfortheregulationandsupervisionofbanksaswellasguidelinesandsoundpractices; • Addressingregulatoryandsupervisorygapsthatposerisks tofinancialstability; • MonitoringtheimplementationofBCBSstandardsinmembercountriesandbeyondwiththepurposeofensuringtheirtimely,consistentandeffectiveimplementationandcontributingto a"levelplayingfield"amonginternationally-activebanks; • ConsultingwithcentralbanksandbanksupervisoryauthoritieswhicharenotmembersoftheBCBStobenefitfromtheirinputintotheBCBSpolicy formulationprocessandtopromotetheimplementationofBCBS InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  19. P age |19 standards,guidelinesandsoundpracticesbeyondBCBSmembercountries;and (g)Coordinatingandcooperatingwithotherfinancialsectorstandardsettersandinternationalbodies,particularlythoseinvolvedinpromotingfinancialstability. 3.Legalstatus TheBCBSdoesnotpossessanyformalsupranationalauthority.Itsdecisionsdonothavelegalforce. Rather,theBCBSreliesonitsmembers'commitments,asdescribedinSection5,to achieveitsmandate. II.Membership BCBSmembers BCBSmembersincludeorganisationswithdirectbankingsupervisoryauthorityandcentralbanks. AfterconsultingtheCommittee,theBCBSChairmanmayinvite otherorganisationstobecomeBCBSobservers. BCBSmembershipandobserverstatuswillbereviewedperiodically. Inacceptingnewmembers,dueregardwillbegiventotheimportanceoftheirnationalbankingsectorstointernationalfinancialstability. TheCommitteewillmakerecommendationstoitsoversightbody,theGroupofGovernorsandHeadsofSupervision,forchangesinBCBSmembership. TheSecretariatwillpublishthelistofBCBSmembersandobserversonitswebsite. BCBSmembers'responsibilities BCBSmembersarecommittedto: InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  20. P age |20 WorktogethertoachievethemandateoftheBCBS; Promotefinancialstability; Continuouslyenhancetheirqualityofbankingregulationandsupervision; ActivelycontributetothedevelopmentofBCBSstandards,guidelinesandsoundpractices; ImplementandapplyBCBSstandardsintheirdomesticjurisdictions2withinthepre-definedtimeframeestablishedbytheCommittee; UndergoandparticipateinBCBSreviewstoassesstheconsistencyandeffectivenessofdomesticrulesandsupervisorypracticesinrelationtoBCBSstandards;and Promotetheinterestsofglobalfinancialstabilityandnotsolelynationalinterests,whileparticipatinginBCBSworkand decision-making. III.Oversight 6.TheGroupofGovernorsandHeadsofSupervision(GHOS) TheGHOSistheoversightbodyoftheBCBS. TheBCBSreportstotheGHOSandseeks itsendorsementformajordecisions. In addition,theBCBSlooks totheGHOSto: ApprovetheBCBSCharterandanyamendmentstothisdocument; ProvidegeneraldirectionfortheBCBSworkprogramme AppointtheBCBSChairmanfromamongitsmembers. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  21. P age |21 IftheBCBSChairmanceasestobeaGHOSmemberbeforetheendof his/herterm,theGHOSwillappointanewChairman. UntilanewChairmanhasbeenappointed,theSecretaryGeneralassumestheChairman'sfunctions. IV.Organisation 7.Structure TheinternalorganisationalstructureoftheBCBScomprises: TheCommittee Groups,workinggroupsandtaskforces TheChairman TheSecretariat 8.TheCommittee TheCommitteeistheultimatedecision-makingbodyoftheBCBSwithresponsibilityforensuringthatitsmandateis achieved. 8.1Responsibilities TheCommitteeisresponsiblefor: Developing,guidingandmonitoringtheBCBSworkprogrammewithinthegeneraldirectionprovidedbyGHOS; EstablishingandpromotingBCBSstandards,guidelinesandsound practices; Establishinganddisbandinggroups,workinggroupsandtaskforces;approvingandmodifyingtheirmandates;andmonitoringtheirprogress; (e)RecommendingtotheGHOSamendmentstotheBCBSCharter;and InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  22. P age |22 • (f)Decidingontheorganisationalregulationsgoverningitsactivities. • NumberofCommitteemeetings • TheCommitteegenerallymeetsfourtimeseveryyear. • However,theChairmancandecidetoholdadditionalmeetingsasnecessary. • RepresentationatCommittee meetings • TheChairmanpresidesoverCommitteemeetings. • AllBCBSmembersandobserversareentitled to appointonerepresentativetoattendCommitteemeetings. • BCBSrepresentativesshouldbeseniorofficialsoftheirorganisationsandshouldhavetheauthority to committheir institutions. • RepresentationatCommitteemeetingsisexpected tobe,forexample,atthelevelofheadofbankingsupervision, headofbankingpolicy/regulation,centralbankdeputygovernor,headoffinancialstabilitydepartmentorequivalent. • Decisions • DecisionsbytheCommitteearetakenbyconsensusamongitsmembers. • Communicationofdecisions • CommitteedecisionsofpublicinterestshallbecommunicatedthroughtheBCBSwebsite. • TheCommitteeshallissue,whenappropriate,pressstatements tocommunicateitsdecisions. • 9.Groups,workinggroupsandtaskforces • TheBCBS'sworkislargelyorganisedaroundgroups,workinggroupsandtaskforces. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  23. P age |23 • TheSecretariatwillmakepubliclyavailablethelistofBCBSgroupsandworkinggroups. • Groups • BCBSgroupsreportdirectly totheCommittee. • TheyarecomposedofseniorstafffromBCBSmembersthatguideorundertakethemselvesmajorareasofCommitteework.BCBSgroupsformpartofthepermanentinternalstructureoftheBCBSandthusoperatewithoutaspecific deliverableorenddate. • Workinggroups • WorkinggroupsconsistofexpertsfromBCBSmembersthatsupportthetechnicalworkofBCBSgroups. • Taskforces • Taskforces arecreatedtoundertakespecifictasksforalimitedtime. • ThesearegenerallycomposedoftechnicalexpertsfromBCBSmemberinstitutions. • However,whenthesegroupingsarecreatedbytheCommittee,theyconsistofBCBSrepresentativesanddealwithspecificissuesthatrequirepromptattentionoftheCommittee.In suchcases,theyarecalled • high-leveltask forces. • Chairman • TheChairmandirectstheworkoftheCommitteeinaccordancewiththeBCBSmandate. • Appointment • TheChairmanisappointedbytheGHOSforatermofthreeyearsthatcan berenewedonce. • Responsibilities • TheChairman'smainresponsibilitiesareto: InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  24. P age |24 Conveneandchair Committeemeetings. IftheChairmanisunabletoattendaCommitteemeeting,heorshe can designatetheSecretaryGeneralto chairthemeetingonhis/herbehalf; MonitortheprogressoftheBCBSworkprogrammeandprovideoperationalguidancebetweenmeetingstocarryforwardthedecisionsanddirectionsoftheCommittee; Report to theGHOSwhenappropriate;and RepresenttheBCBSexternallyandbetheprincipalspokespersonfortheBCBS. 11.TheSecretariat TheSecretariatisprovidedbytheBankforInternationalSettlements(BIS)andsupportstheworkoftheCommittee,theChairmanandthegroupsaroundwhichtheCommitteeorganisesitswork. TheSecretariatisstaffedmainlybyprofessionalstaff,mostlyontemporarysecondmentfromBCBSmembers. 11.1Responsibilities TheSecretariat'smainresponsibilitiesareto: ProvidesupportandassistancetotheCommittee,theChairman,groups,workinggroupsandtaskforces; EnsuretimelyandeffectiveinformationflowtoallBCBSmembers; Facilitatecoordinationacrossgroups,workinggroupsandtaskforces; FacilitateaclosecontactbetweenBCBSmembersandnon-memberauthorities; SupportthecooperationbetweentheBCBSand otherinstitutions; InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  25. P age |25 • MaintaintheBCBSrecords,administertheBCBSwebsiteanddealwithcorrespondenceoftheBCBS;and • Carry outallotherfunctionsthatareassignedbytheCommitteeandtheChairman. • SecretaryGeneral • TheSecretaryGeneralreportstotheChairmananddirectstheworkoftheSecretariat. • TheSecretaryGeneralmanagesthefinancial,materialandhumanresourcesallocatedtotheSecretariat. • He/shealsoassiststheChairmaninrepresentingtheCommitteeexternally. • TheSecretaryGeneralisselectedbytheChairmanonrecommendationofaselectionpanelcomprisingBCBSand/orGHOSmembersandaseniorrepresentativeoftheBIS. • The termofappointmentistypicallythreeyearswiththepotentialtobeextended. • DeputySecretariesGeneral • DeputySecretariesGeneralreport to andassisttheSecretaryGeneralindischarginghis/herduties. • DeputySecretariesGeneralsubstitutefortheSecretaryGeneralin caseofabsence,incapacityorasrequestedbytheSecretaryGeneral. • DeputySecretariesGeneralareselectedbytheSecretaryGeneralinconjunctionwiththeChairman. • LocationoftheSecretariat • TheSecretariatislocatedattheBISinBasel. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  26. P age |26 V.BCBSstandards,guidelinesandsoundpractices Standards TheBCBSsetsstandardsfortheprudentialregulationandsupervisionof banks. TheBCBSexpectsfullimplementationofitsstandardsbyBCBSmembersandtheirinternationallyactivebanks. However,BCBSstandardsconstituteminimumrequirementsandBCBSmembersmaydecide to gobeyondthem. TheCommitteeexpectsstandardstobeincorporatedintolocallegalframeworksthrougheachjurisdiction'srule-makingprocesswithinthepre-definedtimeframeestablishedbytheCommittee. Ifdeviationfromliteraltranspositionintolocallegalframeworksisunavoidable,membersshouldseekthegreatestpossibleequivalenceofstandardsandtheiroutcome. Guidelines Guidelineselaboratethestandardsinareaswheretheyareconsidered desirablefortheprudentialregulationandsupervisionofbanks, inparticularinternationalactivebanks. TheygenerallysupplementBCBSstandardsbyprovidingadditionalguidanceforthepurposeoftheirimplementation. Soundpractices Soundpracticesgenerallydescribeactualobservedpractices,withthegoalofpromotingcommonunderstandingandimprovingsupervisoryorbankingpractices. BCBSmembersareencouraged to comparethesepracticeswiththoseappliedbythemselvesandtheirsupervisedinstitutionstoidentifypotentialareasforimprovement. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  27. P age |27 • VI.Consultationwithnon-memberauthorities • Consultationwithnon-memberauthorities • Consistentwiththeactivitiesdescribedundersection2,theBCBSiscommitted to consultingwidelyonits activitieswithnon-memberauthoritiesthroughthefollowingstructuresandmechanisms: • TheBaselConsultativeGroup(BCG) • TheBCGprovidesaforumfordeepeningtheCommittee'sengagementwithsupervisorsaroundtheworldonbankingsupervisoryissues. • Itfacilitatesbroad supervisorydialoguewithnon-memberauthoritieson newCommitteeinitiativesearlyintheprocessbygatheringseniorrepresentativesfromvariouscountries,internationalinstitutionsandregionalgroupsofbankingsupervisorsthatarenotmembersoftheCommittee. • TheInternationalConferencesofBankingSupervisors(ICBS) • ThebiennialICBSprovidesavenueforsupervisorsaroundtheworld todiscussissuesofcommoninterest. • ParticipationinBCBSgroups,workinggroupsandtaskforces • ByparticipatingasobserversinBCBSbodies,non-memberauthoritiescontribute to theCommittee'spolicydevelopmentwork. • TheFinancialStabilityInstitute(FSI) • TheFSIisajointinitiativeoftheBCBSandtheBIStoassistsupervisorsaroundtheworldinimplementingsoundprudentialstandards. • TheBCBSsupportsFSIactivities,including inparticulartheBCBS-FSIHighLevelMeetings. • Thesearetargetedatseniorpolicymakerswithincentralbanks andsupervisoryauthoritiesandprovideaseriesofregionalforafordistributinginformationonBCBSstandards,keepingparticipantsupdatedonCommitteework,sharingsupervisorypracticesandconcerns,andestablishingandmaintainingstrongcontacts. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  28. P age |28 15.5Regionalgroupsofbankingsupervisors TheBCBSsupportstheworkandactivitiesofregionalgroupsofbankingsupervisorsworldwide. SecretariatstaffmayparticipateinmeetingsofsuchgroupstoexchangeideasandseekfeedbackonBCBSwork. VII.Relationshipwithotherinternationalfinancialbodies 16.Internationalcooperation TheBCBScooperateswithother internationalfinancialstandardsettersandpublicsectorbodieswiththepurposeofachievinganenhancedcoordinationofpolicydevelopmentandimplementation. In carryingouttheirresponsibilitiestosupportthiscooperation,theChairmanandtheSecretariatwillpayparticularattentiontotheneedtocomplywiththeBCBS'sdueprocessandgovernancearrangements. Togetherwith otherinternationalfinancialstandardsetters,theBCBSsponsors theJointForum,whereissuesofcommonconcerntothestandardsetters canbeaddressedandrecommendationsforcoordinatedaction canbedeveloped. TheBCBSisamemberoftheFinancialStabilityBoard(FSB)and participatesintheFSB'sworktodevelop,coordinateandpromotetheimplementationofeffectiveregulatory,supervisoryand otherfinancialsectorpolicies. VIII. Public consultation process 17.Publicconsultation processofdraftBCBSstandards,guidelinesandsoundpractices In principle,theBCBSseeksinputfromallrelevantstakeholderson policyproposals. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  29. P age |29 TheconsultationprocesswillincludeissuingapublicinvitationtointerestedpartiestoprovidecommentsinwritingtotheSecretariatonpolicyproposalsissuedbytheCommittee,withinaspecifiedtimeframe. Theconsultationperiodshallnormallylast90calendardays,butcouldexceptionallybeshorterorlonger. Asageneralrule,responses topublicinvitationsforcommentsshallbepublishedontheBCBSwebsite,unlessconfidentialtreatmentisrequestedbyrespondents. ThisprocessiscompulsoryforBCBSstandards. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  30. P age |30 CommissionerMichelBarnier TheimpactofthelatestBaselCommitteeliquiditydevelopmentsforCapitalRequirements(CRD4)intheEU InthelightoftheGroupofGovernorsandHeadsofSupervisionmeetingandtheBaselCommitteeonBankingSupervisionpressreleasedated6January2013 "IwelcometheunanimousagreementreachedbytheBaselCommitteeontherevisedliquiditycoverageratioandthegradualapproachforitsphasing-inbyclearlydefineddates. ThisissignificantprogresswhichaddressesissuesalreadyraisedbytheEuropeanCommission. Wenowneedtomake fulluseoftheobservationperiod,andlearnfromthereportsthattheEuropeanBankingAuthoritywillprepareontheresultsoftheobservationperiod,beforeformallyimplementing in 2015theliquiditycoverageratiounderEUlawin linewiththeBaselstandards. Thetreatmentofliquidityisfundamental, bothforthestabilityofbanksaswellasfortheirrolein supportingwidereconomicrecovery. Inow callupontheParliamentandtheCounciltosuccessfullyconcludetheCRD4triloguenegotiationsinthecomingweeks." Context TheBaselCommitteeonBankingSupervision(BCBS)hasagreedapackageofLCR(liquiditycoverageratio)revisionsunanimouslyaswellasits2013workplan. TheLCRrevisionsincludeanexpansionofeligibleassets,alessseverecalibrationforcertaincashflowsandaphasing-inarrangementfromJanuary2015to2019. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  31. P age |31 ThecurrentCommissionapproachtoliquidityintheCRD4negotiations,namelyfirstareportingperiodfollowedbycomprehensiveEuropeanBankingAuthority(EBA)Reportsandsubsequentlyadelegatedactby theCommissiontodefinethedetailedratioremainsfullyvalid. Backgroundinformation TheCommission'sapproachtoliquidityinCRD4stillremainsvalidinthelightofthelatestBasel Committeeapprovaloftherevisionofanumberofparametersandcalibrationsonliquidity(GHOSmeetingof6January). In theBaselCommittee,theEuropeanCentralBank,theEuropeanCommissionandvariouscountriesincludingfromtheEUhadarguedforsucharevision. AttheleveloftheBaselCommittee,thefinalpackageofLCRrevisionswillnow besubjecttoanobservationperiodwithaQuantitativeImpactStudy(QIS)thatwilltakeplacein 2013 togetherwithsomeotherimportantworkthatstillneedstobecompletedinthecomingyear. TheEUneedstotake fullbenefitofthisobservationperiodandlearnfromit,asthisisthefirsttimeinhistorythatregulatorsaredefininggloballyharmonized,quantitativeliquiditystandards. TheEBAwillmakereportsontheresultsoftheobservationperiodforEUbanksbeforetheendof2013. Basedontheevaluationofthiswork,theCommissionwillproposedefiningthedetailedLCRthroughadelegated act(i.e.legislationadoptedbytheCommissionprovidednoobjectionsareraisedbytheEPandtheCouncil). Nevertheless,importantworkstillremains tobecompletedattheglobalandEuropeanlevels. Thisincludesthedeterminationofalternative,market-basedindicatorsforthedefinitionofHighQualityLiquidAssets(HQLA);thetreatmentofCentralBankfacilitieswhichcouldimpactuponthedefinitionofHQLAandrelatedcashflows;andthetreatmentofmarketvaluationchangesonderivativecashflows. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  32. P age |32 Inthislight,thebestcoursecontinuestoberapidadoptionoftheCRD4packagewhileleavingthenecessaryflexibilitytoimplementthefinaldetailed LCRstandardthroughadelegatedact,taking intoaccounttheon-goingworkbyBaselandthecomprehensiveEBAreports. Subjecttothisapproach,the textsonthetablenow oftheEuropeanParliamentandCouncilshouldbeadoptedshortly,hopefullyin thecoming weeks. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  33. P age |33 BaselIII:TheLiquidity CoverageRatioandliquidityriskmonitoringtools,January2013 Introduction ThisdocumentpresentsoneoftheBaselCommittee’s keyreformstodevelopamoreresilientbankingsector:theLiquidityCoverageRatio(LCR). The objectiveoftheLCRistopromotethe short-termresilienceoftheliquidityriskprofileofbanks. Itdoes thisbyensuringthatbankshaveanadequatestock ofunencumberedhigh-qualityliquidassets(HQLA)that canbeconverted easilyandimmediatelyinprivatemarketsintocashtomeettheirliquidityneedsfora30calendardayliquiditystressscenario. TheLCRwillimprovethebankingsector’sabilitytoabsorbshocksarisingfromfinancialandeconomicstress,whateverthesource,thusreducingtherisk ofspilloverfromthefinancialsectortotherealeconomy. ThisdocumentsetsouttheLCRstandardandtimelinesforitsimplementation. Duringtheearly“liquidityphase”ofthefinancialcrisisthatbeganin2007,manybanks–despiteadequate capitallevels– stillexperienceddifficultiesbecausetheydidnotmanagetheirliquidityinaprudentmanner. Thecrisisdrovehometheimportanceofliquiditytotheproperfunctioningoffinancialmarketsandthebankingsector. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  34. P age |34 Priortothecrisis,assetmarketswerebuoyantandfundingwasreadilyavailableatlow cost. Therapidreversal inmarketconditionsillustratedhowquicklyliquiditycanevaporate,andthatilliquiditycanlastforanextendedperiodoftime. Thebankingsystemcameunderseverestress,whichnecessitatedcentralbankactiontosupportboththefunctioningofmoneymarketsand, insomecases,individualinstitutions. Thedifficultiesexperiencedbysomebanks wereduetolapsesinbasicprinciplesofliquidityrisk management. In response,asthefoundationofitsliquidityframework,theCommitteein2008publishedPrinciplesforSoundLiquidityRiskManagementandSupervision(“SoundPrinciples”). TheSoundPrinciplesprovidedetailedguidanceontheriskmanagementandsupervisionoffundingliquidityriskandshouldhelppromotebetterriskmanagementinthiscriticalarea,butonlyifthereisfullimplementationbybanksandsupervisors. Assuch,theCommitteewillcontinuetomonitortheimplementationbysupervisorstoensurethatbanks adheretothesefundamentalprinciples. Tocomplementtheseprinciples,theCommitteehasfurtherstrengtheneditsliquidityframeworkbydevelopingtwo minimum standardsforfundingliquidity. Thesestandardshavebeendeveloped toachievetwo separatebutcomplementaryobjectives. Thefirstobjectiveistopromoteshort-termresilienceofabank’sliquidityriskprofilebyensuringthatithassufficientHQLAtosurviveasignificantstressscenariolastingforonemonth. TheCommitteedevelopedtheLCRtoachievethisobjective. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  35. P age |35 Thesecondobjectiveis topromoteresilienceoveralongertimehorizon bycreatingadditionalincentivesforbanks to fundtheiractivitieswithmorestablesourcesoffundingonanongoing basis. TheNetStableFundingRatio(NSFR),whichisnotcoveredbythisdocument,supplementstheLCRandhasatimehorizonofoneyear. Ithasbeendevelopedtoprovideasustainablematuritystructureofassetsandliabilities. Thesetwo standardsarecomprisedmainlyofspecificparameterswhichareinternationally“harmonised”withprescribedvalues. Certainparameters,however,containelementsofnationaldiscretiontoreflectjurisdiction-specificconditions. In thesecases,theparametersshouldbetransparentandclearly outlinedintheregulationsofeachjurisdictiontoprovideclaritybothwithinthejurisdictionandinternationally. ItshouldbestressedthattheLCRstandardestablishesaminimumlevelofliquidityforinternationallyactivebanks. BanksareexpectedtomeetthisstandardaswellasadheretotheSoundPrinciples. ConsistentwiththeCommittee’s capitaladequacystandards,nationalauthoritiesmayrequirehigherminimumlevelsofliquidity. In particular,supervisorsshouldbemindfulthattheassumptionswithintheLCRmaynot captureallmarketconditionsorallperiodsofstress. Supervisorsarethereforefreetorequireadditionallevelsofliquiditytobeheld,iftheydeemtheLCRdoesnotadequatelyreflecttheliquidityrisksthattheirbanks face. GiventhattheLCRis,onitsown, insufficienttomeasurealldimensionsofabank’sliquidityprofile,theCommitteehasalso InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  36. P age |36 developedasetofmonitoringtoolstofurtherstrengthenandpromoteglobalconsistencyinliquidityrisk supervision. ThesetoolsaresupplementarytotheLCRandaretobeusedforongoingmonitoringoftheliquidityriskexposuresofbanks,andincommunicatingtheseexposuresamonghomeandhostsupervisors. TheCommitteeisintroducingphase-inarrangementstoimplement theLCRtohelp ensurethatthebankingsectorcanmeetthestandardthroughreasonablemeasures,whilestillsupportinglendingto theeconomy. TheCommitteeremainsfirmlyoftheviewthattheLCRisanessentialcomponentofthesetofreformsintroducedbyBaselIIIand,whenimplemented,willhelpdeliveramorerobustandresilientbankingsystem. However,theCommitteehasalsobeenmindfuloftheimplicationsofthestandardforfinancialmarkets,creditextensionandeconomicgrowth,andofintroducingtheLCRatatimeofongoingstrainsinsomebankingsystems. Ithas thereforedecidedtoprovideforaphasedintroductionoftheLCR,inamannersimilartothatoftheBaselIIIcapitaladequacyrequirements. Specifically,theLCRwillbeintroducedasplannedon1January2015,buttheminimumrequirementwillbesetat60%andriseinequalannualstepstoreach100%on1January2019. Thisgraduatedapproach,coupledwiththerevisionsmade tothe2010publicationoftheliquiditystandards,aredesigned to ensurethattheLCR canbeintroducedwithoutmaterialdisruptiontotheorderlystrengtheningofbankingsystemsortheongoingfinancingofeconomicactivity. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  37. P age |37 • TheCommitteealsoreaffirmsitsviewthat,duringperiodsofstress,itwouldbeentirelyappropriateforbankstousetheirstock ofHQLA,therebyfallingbelow theminimum. • Supervisorswillsubsequentlyassessthissituationandwillgiveguidanceonusability accordingto circumstances. • Furthermore,individualcountriesthatarereceivingfinancialsupportformacroeconomicandstructuralreformpurposesmaychooseadifferentimplementationschedulefortheirnationalbankingsystems,consistentwiththedesignoftheirbroadereconomicrestructuringprogramme. • TheCommitteeiscurrentlyreviewingtheNSFR,whichcontinues tobesubject to anobservationperiodandremainssubjecttoreview toaddressanyunintendedconsequences. • ItremainstheCommittee’sintentionthattheNSFR,includinganyrevisions,willbecomeaminimumstandardby1January2018. • Thisdocumentisorganisedasfollows: • Part1definestheLCRfor internationallyactivebanksanddealswithapplicationissues. • Part2presentsasetofmonitoringtoolstobeusedbybanksandsupervisorsintheirmonitoringofliquidityrisks. • Part1:TheLiquidityCoverageRatio • TheCommitteehasdevelopedtheLCR topromotetheshort-termresilienceoftheliquidityriskprofileofbanksbyensuringthattheyhavesufficientHQLAtosurviveasignificantstressscenariolasting30calendardays. • TheLCRshouldbeakeycomponentofthesupervisoryapproach toliquidityrisk,butmustbesupplementedbydetailedsupervisoryassessmentsofotheraspectsofthebank’sliquidityriskmanagement InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  38. P age |38 frameworkinlinewiththeSoundPrinciples,theuseofthemonitoringtoolsincludedin Part2,and,induecourse,theNSFR. In addition,supervisorsmayrequireanindividualbanktoadoptmorestringentstandardsorparameterstoreflectitsliquidityriskprofileandthesupervisor’sassessmentofitscompliancewiththeSoundPrinciples. I.ObjectiveoftheLCRanduseofHQLA Thisstandardaimstoensurethatabankhasanadequatestockof unencumberedHQLAthatconsistsofcashorassetsthat canbeconvertedintocashatlittleornolossofvalueinprivatemarkets,tomeetitsliquidityneedsfora30calendardayliquiditystressscenario. Ataminimum,thestockofunencumberedHQLAshouldenablethebanktosurviveuntilDay30ofthestressscenario,bywhichtimeitisassumedthatappropriatecorrectiveactionscanbetakenbymanagementandsupervisors,orthatthebankcanberesolvedin anorderlyway. Furthermore,itgivesthecentralbankadditionaltimetotakeappropriatemeasures,shouldtheyberegardedasnecessary. AsnotedintheSoundPrinciples,giventheuncertaintimingofoutflowsandinflows,banksarealsoexpected tobeawareofanypotentialmismatcheswithinthe30-dayperiodandensurethatsufficientHQLAareavailabletomeetanycashflow gapsthroughouttheperiod. TheLCRbuildsontraditionalliquidity“coverageratio”methodologiesusedinternallybybanks toassessexposuretocontingentliquidityevents. The totalnetcashoutflowsforthescenarioaretobecalculatedfor30calendardaysintothefuture. Thestandardrequiresthat,absentasituationoffinancialstress,thevalueoftheratiobenolowerthan100%(iethestockofHQLAshouldatleastequaltotalnetcashoutflows)onanongoingbasisbecausethestockof unencumberedHQLAisintendedtoserveasadefenceagainstthe InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  39. P age |39 potentialonsetofliquiditystress. Duringaperiodoffinancialstress,however,banksmayusetheirstockofHQLA,therebyfalling below 100%,asmaintainingtheLCRat100%undersuchcircumstancescouldproduceunduenegativeeffectsonthebankandothermarketparticipants. Supervisorswillsubsequentlyassessthissituationandwilladjusttheirresponseflexiblyaccordingtothecircumstances. 18.Inparticular,supervisorydecisionsregardingabank’suseofitsHQLAshouldbeguidedbyconsiderationofthecoreobjectiveand definitionoftheLCR. Supervisorsshouldexercisejudgementintheirassessmentand accountnotonlyforprevailingmacrofinancialconditions,butalsoconsiderforward-lookingassessmentsofmacroeconomicandfinancialconditions. Indeterminingaresponse,supervisorsshouldbeawarethatsomeactionscouldbeprocyclicalifappliedincircumstancesofmarket-widestress. Supervisorsshouldseek totaketheseconsiderationsinto accountonaconsistentbasisacrossjurisdictions. Supervisorsshouldassessconditionsatanearlystage,andtake actionsifdeemednecessary,toaddresspotentialliquidityrisk. Supervisorsshouldallow fordifferentiatedresponsestoareportedLCRbelow100%. Anypotentialsupervisoryresponseshouldbeproportionatewiththedrivers,magnitude,durationandfrequencyofthereportedshortfall. Supervisorsshouldassessanumberoffirm-andmarket-specificfactorsindeterminingtheappropriateresponseaswellasotherconsiderationsrelated tobothdomesticandglobalframeworksandconditions. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  40. P age |40 Potentialconsiderationsinclude,butarenotlimitedto: Thereason(s)thattheLCRfellbelow100%. Thisincludesuseofthestock of HQLA,aninability to rolloverfundingorlargeunexpecteddrawsoncontingentobligations. In addition,thereasonsmayrelatetooverallcredit,fundingandmarketconditions,includingliquidityincredit,assetandfundingmarkets,affectingindividualbanksorallinstitutions,regardlessoftheir owncondition; TheextenttowhichthereporteddeclineintheLCRisdue to afirm-specificormarket-wideshock; Abank’soverallhealthandriskprofile,includingactivities,positionswithrespect to othersupervisoryrequirements,internalrisksystems,controlsand othermanagementprocesses,amongothers; Themagnitude,durationandfrequencyofthereporteddeclineofHQLA; Thepotentialforcontagiontothefinancialsystemandadditionalrestrictedflow ofcreditorreducedmarketliquiditydue to actions tomaintainanLCRof100%; Theavailabilityofothersourcesofcontingentfundingsuchascentralbankfunding,orotheractionsbyprudentialauthorities. (d)SupervisorsshouldhavearangeoftoolsattheirdisposaltoaddressareportedLCRbelow100%. Banksmayusetheirstock ofHQLAinbothidiosyncraticandsystemicstressevents,althoughthesupervisoryresponsemaydifferbetweenthetwo. (i)Ataminimum,abankshouldpresentanassessmentofitsliquidityposition,includingthefactorsthatcontributed to itsLCRfallingbelow InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  41. P age |41 100%,themeasuresthathavebeenandwillbetakenandtheexpectationsonthepotentiallengthofthesituation. Enhancedreportingtosupervisorsshouldbecommensuratewiththedurationoftheshortfall. Ifappropriate,supervisorscouldalsorequireactionsbyabanktoreduceitsexposuretoliquidityrisk,strengthenitsoverallliquidityriskmanagement,orimproveitscontingencyfundingplan. However, in asituationofsufficientlyseveresystem-widestress,effectsontheentirefinancialsystemshouldbeconsidered. Potentialmeasurestorestoreliquiditylevelsshouldbediscussed,andshouldbeexecutedoveraperiodoftimeconsideredappropriatetopreventadditionalstressonthebankandonthefinancialsystemasawhole. (e)Supervisors’responsesshouldbeconsistentwiththeoverallapproachtotheprudentialframework. II.DefinitionoftheLCR 19.Thescenarioforthisstandardentailsacombinedidiosyncraticandmarket-wideshockthatwouldresultin: Therun-offofaproportionofretaildeposits; Apartiallossofunsecuredwholesalefundingcapacity; Apartiallossofsecured,short-termfinancingwithcertaincollateralandcounterparties; Additionalcontractualoutflowsthatwouldarisefromadowngradeinthebank’spubliccreditratingbyuptoandincludingthreenotches,includingcollateralpostingrequirements; InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  42. P age |42 Increasesinmarketvolatilitiesthatimpactthequalityofcollateralorpotentialfutureexposureofderivativepositionsandthusrequirelargercollateralhaircutsoradditionalcollateral,orleadtootherliquidityneeds; Unscheduleddrawsoncommittedbutunusedcreditandliquidityfacilitiesthatthebankhasprovidedtoitsclients;and Thepotentialneedforthebanktobuyback debtorhonour non-contractualobligationsintheinterestofmitigatingreputationalrisk. In summary,thestressscenariospecifiedincorporatesmanyoftheshocksexperiencedduringthecrisisthatstartedin2007intoone significantstressscenarioforwhichabankwouldneedsufficientliquidityonhandtosurviveforupto30calendardays. Thisstresstestshouldbeviewedasaminimumsupervisoryrequirementforbanks. Banksareexpectedtoconducttheirownstressteststoassessthelevelofliquiditytheyshouldholdbeyondthisminimum,andconstructtheirownscenariosthatcouldcausedifficultiesfortheirspecificbusinessactivities. Suchinternalstresstestsshouldincorporatelongertimehorizonsthantheonemandatedbythisstandard. Banksareexpectedtosharetheresultsoftheseadditionalstresstestswithsupervisors. TheLCRhastwocomponents: ValueofthestockofHQLA instressedconditions;and Total netcashoutflows,calculatedaccordingtothescenarioparametersoutlinedbelow. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  43. P age |43 A.StockofHQLA 23.ThenumeratoroftheLCRisthe“stock ofHQLA”. Underthestandard,banksmustholdastockofunencumberedHQLAtocoverthetotal netcashoutflows(asdefinedbelow)overa30-dayperiod undertheprescribedstressscenario. In ordertoqualifyas“HQLA”,assetsshouldbeliquidinmarketsduring atimeofstressand,ideally,becentralbankeligible. Thefollowingsetsoutthecharacteristicsthatsuchassetsshouldgenerallypossessandtheoperationalrequirementsthattheyshould satisfy. 1.CharacteristicsofHQLA 24.AssetsareconsideredtobeHQLAifthey canbeeasilyandimmediatelyconvertedinto cashatlittleornolossofvalue. Theliquidityofanassetdependsontheunderlyingstressscenario,thevolume tobemonetisedandthetimeframeconsidered. Nevertheless,therearecertainassetsthataremorelikelytogeneratefundswithoutincurringlargediscountsinsaleorrepurchaseagreement(repo)marketsduetofire-salesevenintimesofstress. Thissectionoutlines the factorsthatinfluencewhetherornotthemarketforanasset canbereliedupon to raiseliquiditywhenconsideredinthecontextofpossiblestresses. Thesefactorsshouldassistsupervisorsindeterminingwhichassets,despitemeetingthecriteriafromparagraphs49 to54,arenotsufficientlyliquidinprivatemarketstobeincludedinthestockofHQLA. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  44. P age |44 • Fundamentalcharacteristics • Lowrisk:assetsthatarelessriskytendtohavehigherliquidity. • Highcreditstandingoftheissuerandalow degreeofsubordinationincreaseanasset’sliquidity. • Lowduration,low legalrisk,low inflationriskanddenominationin aconvertiblecurrencywithlow foreignexchangerisk allenhanceanasset’sliquidity. • Easeandcertaintyofvaluation:anasset’sliquidityincreasesifmarketparticipantsaremorelikelytoagreeonitsvaluation. • Assetswithmorestandardised,homogenousandsimplestructurestend tobemorefungible,promotingliquidity. • Thepricingformulaofahigh-qualityliquidassetmustbeeasytocalculateandnotdependonstrongassumptions. • Theinputsintothepricingformulamustalsobepubliclyavailable. • In practice,thisshouldruleouttheinclusionofmoststructuredorexoticproducts. • Lowcorrelationwithriskyassets:thestock ofHQLAshouldnotbesubjecttowrong-way(highlycorrelated)risk. • Forexample,assetsissuedbyfinancialinstitutionsaremorelikelytobeilliquidintimesofliquiditystressinthebankingsector. • Listedonadevelopedandrecognisedexchange:beinglistedincreasesanasset’stransparency. • (ii)Market-relatedcharacteristics • - Activeandsizablemarket:theassetshouldhaveactiveoutrightsaleorrepomarketsatalltimes. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  45. P age |45 • Thismeansthat: • Thereshouldbehistoricalevidenceofmarketbreadthandmarketdepth. • Thiscouldbedemonstratedbylowbid-askspreads,hightradingvolumes,andalargeanddiversenumberofmarketparticipants. • Diversityofmarketparticipantsreducesmarketconcentrationandincreasesthereliabilityoftheliquidityinthemarket. • Thereshouldberobustmarketinfrastructureinplace. • ThepresenceofmultiplecommittedmarketmakersincreasesliquidityasquoteswillmostlikelybeavailableforbuyingorsellingHQLA. • Lowvolatility:Assetswhosepricesremainrelativelystableandarelesspronetosharppricedeclinesovertimewillhavealowerprobabilityoftriggeringforcedsalestomeetliquidityrequirements. • Volatilityoftradedpricesandspreadsaresimpleproxymeasuresofmarketvolatility. • Thereshouldbehistoricalevidenceofrelativestabilityofmarketterms(egpricesandhaircuts)andvolumesduringstressedperiods. • Flighttoquality:historically,themarkethasshowntendenciestomoveintothesetypesofassetsinasystemiccrisis. • Thecorrelationbetweenproxiesofmarketliquidityandbankingsystemstressisonesimplemeasurethatcouldbeused. • 25.Asoutlinedbythesecharacteristics,the testofwhetherliquidassetsareof“highquality”isthat,bywayofsaleorrepo,theirliquidity-generatingcapacityisassumedtoremainintacteveninperiodsofsevereidiosyncraticandmarketstress. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  46. P age |46 Lowerqualityassetstypicallyfailtomeetthattest. Anattemptbyabanktoraiseliquidityfromlowerqualityassetsunderconditionsofseveremarketstresswouldentailacceptanceofalargefire-salediscountorhaircuttocompensateforhighmarketrisk. Thatmaynotonlyerodethemarket’sconfidenceinthebank,butwouldalsogeneratemark-to-marketlossesforbanksholdingsimilarinstrumentsandaddto thepressureontheirliquidityposition,thusencouragingfurtherfiresalesanddeclinesinpricesandmarketliquidity. In thesecircumstances,privatemarketliquidityforsuchinstrumentsislikelytodisappearquickly. HQLA(exceptLevel2Bassetsasdefinedbelow)shouldideallybeeligibleatcentralbanks forintradayliquidityneedsandovernightliquidityfacilities. In thepast,centralbankshaveprovidedafurtherbackstoptothesupplyofbankingsystemliquidityunderconditionsofseverestress. Centralbankeligibilityshouldthusprovideadditionalconfidencethatbanksareholdingassetsthatcouldbeusedin eventsofseverestresswithoutdamagingthebroaderfinancialsystem. Thatinturnwouldraiseconfidenceinthesafetyandsoundnessofliquidityriskmanagementinthebankingsystem. Itshouldbenotedhowever,thatcentralbankeligibilitydoesnotbyitselfconstitutethebasisforthecategorisationofanassetasHQLA. 2.Operationalrequirements 28.AllassetsinthestockofHQLAaresubject tothefollowingoperationalrequirements. Thepurposeoftheoperationalrequirementsis to recognisethatnotallassetsoutlinedinparagraphs49-54thatmeettheassetclass, InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  47. P age |47 risk-weightingandcredit-ratingcriteriashouldbeeligibleforthestockasthereare otheroperationalrestrictionsontheavailabilityofHQLAthatcan preventtimelymonetisationduringastressperiod. Theseoperationalrequirementsaredesigned to ensurethatthestockofHQLAismanagedin suchawaythatthebankcan,andisable todemonstratethatitcan,immediatelyusethestockofassetsasasourceofcontingentfundsthatisavailableforthebanktoconvertintocashthroughoutrightsaleorrepo,to fillfundinggapsbetween cashinflowsandoutflowsatanytimeduringthe30-daystressperiod,withnorestrictionontheuseoftheliquiditygenerated. Abankshouldperiodicallymonetisearepresentativeproportionoftheassetsinthestockthroughrepooroutrightsale,inordertotestitsaccesstothemarket,theeffectivenessofitsprocessesformonetisation,theavailabilityoftheassets,andtominimisetherisk ofnegativesignallingduringaperiodofactualstress. Allassetsinthestockshouldbeunencumbered.“Unencumbered”meansfreeoflegal,regulatory,contractualorother restrictionsontheabilityofthebanktoliquidate,sell,transfer,orassigntheasset. Anassetinthestockshouldnotbepledged(eitherexplicitlyorimplicitly)tosecure,collateraliseorcredit-enhanceanytransaction,norbedesignatedto coveroperationalcosts(suchasrentsandsalaries). Assetsreceivedinreverserepoandsecuritiesfinancingtransactionsthatareheldatthebank,havenotbeenrehypothecated,andarelegallyandcontractuallyavailableforthebank'suse can beconsideredaspartofthestockofHQLA. In addition,assetswhichqualifyforthestockofHQLAthathavebeenpre-positionedordepositedwith,or pledgedto,thecentralbankorapublicsectorentity(PSE)buthavenotbeenused to generateliquiditymaybe includedinthestock. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  48. P age |48 Abankshouldexcludefromthestockthoseassetsthat,althoughmeetingthedefinitionof“unencumbered”specifiedinparagraph31,thebankwouldnothavetheoperationalcapabilitytomonetisetomeetoutflowsduringthestressperiod. Operationalcapabilitytomonetiseassetsrequireshavingproceduresandappropriatesystemsinplace,includingprovidingthefunctionidentifiedinparagraph33withaccesstoallnecessaryinformation toexecutemonetisationofanyassetatanytime. Monetisationoftheassetmustbeexecutable,fromanoperationalperspective,inthestandardsettlementperiodfortheassetclass intherelevantjurisdiction. Thestockshouldbeunderthecontrolofthefunctionchargedwith managingtheliquidityofthebank(egthetreasurer),meaningthefunctionhasthecontinuousauthority,andlegalandoperationalcapability,tomonetiseanyassetinthestock. Controlmustbeevidencedeitherbymaintainingassetsinaseparatepoolmanagedbythefunctionwiththesoleintentforuseasasourceofcontingentfunds,orbydemonstratingthatthefunctioncanmonetisetheassetatanypointinthe30-daystressperiodandthattheproceedsof doingsoareavailable to thefunctionthroughoutthe30-daystressperiodwithoutdirectlyconflictingwithastatedbusinessorriskmanagementstrategy. Forexample,anassetshouldnotbeincludedinthestockifthesaleofthatasset,withoutreplacementthroughoutthe30-dayperiod, wouldremoveahedgethatwouldcreateanopenrisk positionin excessofinternallimits. Abankispermittedtohedgethemarketrisk associatedwithownershipofthestockofHQLAandstillincludetheassetsinthestock. Ifitchoosestohedgethemarketrisk,thebankshouldtakeintoaccount(inthemarketvalueappliedtoeachasset)thecashoutflow thatwould InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  49. P age |49 ariseifthehedgeweretobeclosedoutearly(intheeventoftheassetbeingsold). InaccordancewithPrinciple9oftheSoundPrinciplesabank“shouldmonitorthelegalentityandphysicallocationwherecollateralisheldand how itmaybemobilisedinatimelymanner”. Specifically,itshouldhaveapolicy inplacethatidentifieslegalentities,geographicallocations,currenciesandspecificcustodialorbankaccountswhereHQLAareheld. In addition,thebankshoulddeterminewhetheranysuchassetsshould beexcludedforoperationalreasonsandtherefore,havetheabilitytodeterminethecompositionofitsstockonadailybasis. Asnotedinparagraphs171and172,qualifyingHQLAthatareheld tomeetstatutoryliquidityrequirementsatthelegalentityorsub-consolidatedlevel(whereapplicable)mayonlybeincludedinthestockattheconsolidatedleveltotheextentthattherelatedrisks(asmeasuredbythelegalentity’sorsub-consolidatedgroup’snetcashoutflowsintheLCR)arealsoreflectedintheconsolidatedLCR. AnysurplusofHQLAheldatthelegalentity canonlybeincludedintheconsolidatedstock ifthoseassetswouldalsobefreelyavailable totheconsolidated(parent)entityintimesofstress. In assessingwhetherassetsarefreelytransferableforregulatorypurposes,banksshouldbeawarethatassetsmaynotbefreelyavailabletotheconsolidatedentityduetoregulatory,legal,tax,accountingorotherimpediments. Assetsheldinlegalentitieswithoutmarketaccessshouldonlybeincluded totheextentthatthey canbefreelytransferredtootherentitiesthatcouldmonetisetheassets. In certainjurisdictions,large,deepand activerepomarketsdonotexistforeligibleassetclasses,andthereforesuchassetsarelikely to bemonetisedthroughoutrightsale. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  50. P age |50 In thesecircumstances,abankshouldexcludefromthestockofHQLAthoseassetswherethereareimpediments tosale,suchaslargefire-salediscountswhichwould causeit tobreachminimumsolvencyequirements,orrequirementstoholdsuchassets,including,butnotlimitedto,statutoryminimuminventoryrequirementsformarketmaking. BanksshouldnotincludeinthestockofHQLAanyassets,orliquiditygeneratedfromassets,theyhavereceivedunderrightofrehypothecation,ifthebeneficialownerhasthecontractualrightto withdrawthoseassetsduringthe30-daystressperiod. Assetsreceivedascollateralforderivativestransactionsthatarenotsegregatedandarelegallyable to berehypothecatedmaybeincludedinthestockofHQLAprovidedthatthebankrecordsanappropriateoutflowfortheassociatedrisks assetoutin paragraph116. AsstatedinPrinciple8oftheSoundPrinciples,abankshouldactivelymanageitsintradayliquiditypositionsandrisks tomeetpaymentandsettlementobligationsonatimelybasisunderbothnormalandstressedconditionsandthuscontributetothesmoothfunctioningofpaymentandsettlementsystems. BanksandregulatorsshouldbeawarethattheLCRstressscenariodoesnotcoverexpectedorunexpectedintradayliquidityneeds. WhiletheLCRisexpectedtobemetandreportedinasinglecurrency,banksareexpectedtobeabletomeettheirliquidityneedsineachcurrencyandmaintainHQLAconsistentwiththedistributionoftheirliquidityneedsbycurrency. Thebankshouldbeabletousethestockto generateliquidityin thecurrencyandjurisdictioninwhichthenetcashoutflowsarise. Assuch,theLCRbycurrencyisexpectedtobemonitoredandreportedtoallow thebankanditssupervisortotrackanypotentialcurrencymismatchissuesthatcouldarise,asoutlinedinPart2. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

More Related