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D ear Mem b er,

1 Bas e l iii C om p l i a n c e Pr o fe s s iona l s Ass o c i a t i on ( B ii i CPA) 1200 G St r e et N W S u it e 8 0 0 Wa s h i n g t o n , D C 2000 5 - 6705 U S A T el: 202 - 44 9 - 9 750 W e b : w w w.ba s e l - iii - a s soc i a t i o n . com. D ear Mem b er,

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D ear Mem b er,

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  1. 1 BaseliiiComplianceProfessionalsAssociation(BiiiCPA)1200GStreetNWSuite800Washington,DC20005-6705USATel:202-449-9750Web:www.basel-iii-association.com DearMember, IfyouwantonlythepresentationsoftheCertifiedBaseliiiProfessional(CBiiiPro)program,youcanhavethemat$97(instead of$297,thecostofthefullprogram).Tolearnmore: www.basel-ii-association.com/Distance_Learning_Online_Certification _CBiiiPro_Presentations.htm Wehadsuchaninterestingmonth…andthemostinterestingdayswerejustafterthefirstweekofthemonth,whenwecouldreadtheamendedliquiditystandards… BaselIII-GroupofGovernorsandHeadsofSupervisionendorsesrevisedliquiditystandardforbanks 6January2013 TheGroupofGovernorsandHeadsofSupervision(GHOS),theoversightbodyoftheBaselCommitteeonBankingSupervision,mettodaytoconsidertheBaselCommittee'samendmentstotheLiquidityCoverageRatio(LCR)asaminimumstandard. Itunanimouslyendorsedthem. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  2. 2 Today'sagreementisaclearcommitmenttoensurethatbanksholdsufficientliquidassetstopreventcentralbanksbecomingthe"lenderoffirstresort". TheGHOSalsoendorsedanewCharterfortheCommittee,and discussedtheCommittee'smedium-termworkagenda. TheGHOSreaffirmedtheLCRasanessentialcomponentoftheBaselIIIreforms. ItendorsedapackageofamendmentstotheformulationoftheLCRannouncedin2010. Thepackagehasfourelements: Revisionstothedefinitionofhighqualityliquidassets(HQLA)andnetcashoutflows Atimetableforphase-inofthestandard Areaffirmationoftheusabilityofthestockofliquidassetsinperiodsofstress,includingduringthetransitionperiod AnagreementfortheBaselCommitteetoconductfurtherworkonthe interactionbetweentheLCRandtheprovisionofcentralbankfacilities. AsummarydescriptionoftheagreedLCRisinAnnex1. ThechangestothedefinitionoftheLCR,developedandagreedbytheBaselCommitteeoverthepasttwoyears,includeanexpansionintherangeofassetseligibleasHQLAandsomerefinementstotheassumedinflowandoutflowratestobetterreflectactualexperienceintimesofstress. ThesechangesaresetoutinAnnex2. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  3. 3 TheGHOSagreedthattheLCRshouldbesubjecttophase-inarrangementswhichalignwiththosethatapplytotheBaselIIIcapital adequacyrequirements. Specifically,theLCRwillbeintroducedasplannedon1January2015,buttheminimumrequirementwillbeginat60%,risinginequalannualstepsof10percentagepointstoreach100%on1January2019. ThisgraduatedapproachisdesignedtoensurethattheLCRcanbeintroducedwithoutdisruptiontotheorderlystrengtheningofbankingsystemsortheongoingfinancingofeconomicactivity. TheGHOSagreedthat,duringperiodsofstressitwouldbeentirelyappropriateforbankstousetheirstockofHQLA,therebyfallingbelowtheminimum. Moreover,itistheresponsibilityofbanksupervisorstogiveguidanceonusabilityaccordingtocircumstances. TheGHOSalsoagreedtodaythat,sincedepositswithcentralbanksarethemost-indeed,insomecases,theonly-reliableformofliquidity,theinteractionbetweentheLCRandtheprovisionofcentralbankfacilitiesiscriticallyimportant. TheCommitteewillthereforecontinuetoworkonthisissueoverthenextyear. GHOSmembersendorsedtwootherareasoffurtheranalysis. First,theCommitteewillcontinuetodevelopdisclosurerequirementsforbankliquidityandfundingprofiles. Second,theCommitteewillcontinuetoexploretheuseofmarket-basedindicatorsofliquiditytosupplementtheexistingmeasuresbasedonassetclassesandcreditratings. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  4. 4 TheGHOSdiscussedandendorsedtheBaselCommittee'smedium-term workagenda. FollowingthesuccessfulagreementoftheLCR,theCommitteewillnowpressaheadwiththereviewoftheNetStableFundingRatio. Thisisacrucialcomponentinthenewframework,extendingthescopeofinternationalagreementtothestructureofbanks'debtliabilities. ThiswillbeapriorityfortheBaselCommitteeoverthenexttwoyears. Overthenextfewyears,theBaselCommitteewillalso: Completetheoverhaulofthepolicyframeworkcurrentlyunderway Continuetostrengthenthepeerreviewprogrammeestablishedin2012tomonitortheimplementationofreformsinindividualjurisdictions Monitortheimpactof,andindustryresponseto,recentandproposed regulatoryreforms. During2012theCommitteehasbeenexaminingthecomparabilityofmodel-basedinternalriskweightingsandconsideringtheappropriatebalancebetweenthesimplicity,comparabilityandrisksensitivityoftheregulatoryframework. TheGHOSencouragedcontinuationofthisworkin2013asamatterofpriority. Furthermore,theGHOSsupportedtheCommittee'sintentiontopromoteeffectivemacro-andmicroprudentialsupervision. TheGHOSalsoendorsedanewCharterfortheBaselCommittee. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  5. 5 ThenewChartersetsouttheCommittee'sobjectivesandkeyoperatingmodalities,andisdesignedtoimproveunderstandingoftheCommittee'sactivitiesanddecision-makingprocesses. Finally,theGHOSreiteratedtheimportanceoffull,timelyandconsistentimplementationofBaselIIIstandards. MervynKing,ChairmanoftheGHOSandGovernoroftheBankofEngland,said, "TheLiquidityCoverageRatioisakeycomponentoftheBaselIIIframework. Theagreementreachedtodayisaverysignificantachievement. Forthefirsttimeinregulatoryhistory,wehaveatrulyglobalminimumstandardforbankliquidity. Importantly,introducingaphasedtimetablefortheintroductionoftheLCR,andreaffirmingthatabank'sstockofliquidassetsareusablein timesofstress,willensurethatthenewliquiditystandardwillinnowayhindertheabilityoftheglobalbankingsystemtofinancearecovery." StefanIngves,ChairmanoftheBaselCommitteeandGovernoroftheSverigesRiksbank,noted: "TheamendmentstotheLCRaredesignedtoensurethatitprovidesasoundminimumstandardforbankliquidity-astandardthatreflectsactualexperienceduringtimesofstress. ThecompletionofthisworkwillallowtheBaselCommitteetoturnitsattentiontorefiningtheothercomponentofthenewgloballiquiditystandards,theNetStableFundingRatio,whichremainssubjecttoan observationperiodaheadofitsimplementationin2018." BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  6. 6 Annex1 SummarydescriptionoftheLCR Topromoteshort-termresilienceofabank’sliquidityriskprofile,theBaselCommitteedevelopedtheLiquidityCoverageRatio(LCR). Thisstandardaimstoensurethatabankhasanadequatestockofunencumberedhighqualityliquidassets(HQLA)whichconsistsofcashorassetsthatcanbeconvertedintocashatlittleornolossofvalueinprivatemarketstomeetitsliquidityneedsfora30calendardayliquiditystressscenario. TheLCRhastwocomponents: ThevalueofthestockofHQLA Totalnetcashoutflows andisexpressedas: HighQualityLiquidAssets ThenumeratoroftheLCRisthestockofHQLA. Underthestandard,banksmustholdastockofunencumberedHQLAtocoverthetotalnetcashoutflowsovera30-dayperiodundertheprescribedstressscenario. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  7. 7 InordertoqualifyasHQLA,assetsshouldbeliquidinmarketsduringatimeofstressand,inmostcases,beeligibleforuseincentralbankoperations. CertaintypesofassetswithinHQLAaresubjecttoarangeofhaircuts.HQLAarecomprisedofLevel1andLevel2assets. Level1assetsgenerallyincludecash,centralbankreserves,andcertain marketablesecuritiesbackedbysovereignsandcentralbanks,among others. Theseassetsaretypicallyofthehighestqualityandthemostliquid,andthereisnolimitontheextenttowhichabankcanholdtheseassetstomeettheLCR. Level2assetsarecomprisedofLevel2AandLevel2Bassetsandincludecertainmarketablegovernmentsecuritiesaswellascorporatedebtsecurities,residentialmortgagebackedsecuritiesandequitiesthatmeetcertainconditions. Level2assets(comprisingLevel2AandLevel2Bassets)aretypicallyofslightlylesserqualityandmaynotinaggregateaccountformorethan40%ofabank’sstockofHQLA. Level2Bassetsmaynotaccountformorethan15%ofabank’stotalstockofHQLA. Totalnetcashoutflows ThedenominatoroftheLCRisthetotalnetcashoutflows. Itisdefinedastotalexpectedcashoutflows,minustotalexpectedcashinflows,inthespecifiedstressscenarioforthesubsequent30calendardays. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  8. 8 Totalexpectedcashoutflowsarecalculatedbymultiplyingthe outstandingbalancesofvariouscategoriesortypesofliabilitiesand off-balancesheetcommitmentsbytheratesatwhichtheyareexpectedtorunofforbedrawndown. Totalexpectedcashinflowsarecalculatedbymultiplyingtheoutstandingbalancesofvariouscategoriesofcontractualreceivablesbytheratesatwhichtheyareexpectedtoflowin. Totalcashinflowsaresubjecttoanaggregatecapof75%oftotalexpectedcashoutflows,therebyensuringaminimumlevelofHQLAholdingsatalltimes. LiquidityCoverageRatio Thestandardrequiresthat,absentasituationoffinancialstress,thevalueoftheratiobenolowerthan100%(iethestockofHQLAshouldatleastequaltotalnetcashoutflows). BanksareexpectedtomeetthisrequirementcontinuouslyandholdastockofunencumberedHQLAasadefenceagainstthepotentialonsetofliquiditystress. Duringaperiodoffinancialstress,however,banksmayusetheirstockofHQLA,therebyfallingbelow100%. Important-The100%thresholdistheminimumrequirementabsentaperiodoffinancialstress,andafterthephase-inarrangementsarecomplete. Referencesto100%maybeadjustedforanyphase-inarrangementsinforceataparticulartime. Annex2 CompletesetofagreedchangestotheLiquidityCoverageRatio BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  9. 9 • HIGHQUALITYLIQUIDASSETS(HQLA) • ExpandthedefinitionofHQLAsubjecttoahigherhaircutandlimit • CorporatedebtsecuritiesratedA+toBBB–witha50%haircut • Certainunencumberedequitiessubjecttoa50%haircut • Certainresidentialmortgage-backedsecuritiesratedAAorhigherwitha25%haircut • Aggregateofadditionalassets,afterhaircuts,subjecttoa15%limitoftheHQLA • RatingrequirementonqualifyingLevel2assets • Useoflocalratingscalesandinclusionofqualifyingcommercialpaper • Usabilityoftheliquiditypool • IncorporatelanguagerelatedtotheexpectationthatbankswillusetheirpoolofHQLAduringperiodsofstress • Operationalrequirements • RefineandclarifytheoperationalrequirementsforHQLA • OperationofthecaponLevel2HQLA • Reviseandimprovetheoperationofthecap • Alternativeliquidasset(ALA)framework • Developthealternativetreatmentsandincludeafourthoptionforsharia-compliantbanks BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  10. 10 • Centralbankreserves • Clarifylanguagetoconfirmthatsupervisorshavenationaldiscretiontoincludeorexcluderequiredcentralbankreserves(aswellasovernightandcertaintermdeposits)asHQLAastheyconsiderappropriate • INFLOWSANDOUTFLOWS • Insureddeposits • Reduceoutflowoncertainfullyinsuredretaildepositsfrom5%to3% • Reduceoutflowonfullyinsurednon-operationaldepositsfrom • non-financialcorporates,sovereigns,centralbanksandpublicsectorentities(PSEs)from40%to20% • Non-financialcorporatedeposits • Reducetheoutflowratefor“non-operational”depositsprovidedby • non-financialcorporates,sovereigns,centralbanksandPSEsfrom75%to40% • Committedliquidityfacilitiestonon-financialcorporates • Clarifythedefinitionofliquidityfacilitiesandreducethedrawdownrateontheunusedportionofcommittedliquidityfacilitiestonon-financialcorporates,sovereigns,centralbanksandPSEsfrom100%to30% • Committedbutunfundedinter-financialliquidityandcreditfacilities • Distinguishbetweeninterbankandinter-financialcreditandliquidityfacilitiesandreducetheoutflowrateontheformerfrom100%to40% • Derivatives BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  11. 11 • AdditionalderivativesrisksincludedintheLCRwitha100%outflow(relatestocollateralsubstitution,andexcesscollateralthatthebankiscontractuallyobligatedtoreturn/provideifrequiredbyacounterparty) • Introduceastandardisedapproachforliquidityriskrelatedtomarketvaluechangesinderivativespositions • Assumenetoutflowof0%forderivatives(andcommitments)thatare contractuallysecured/collateralisedbyHQLA • Tradefinance • Includeguidancetoindicatethatalowoutflowrate(0–5%)isexpectedtoapply • Equivalenceofcentralbankoperations • Reducetheoutflowrateonmaturingsecuredfundingtransactionswithcentralbanksfrom25%to0% • Clientservicingbrokerage • Clarifythetreatmentofactivitiesrelatedtoclientservicingbrokerage(whichgenerallyleadtoanincreaseinnetoutflows) • OTHER • Rulestextclarifications • ClearerguidanceontheusabilityofHQLA,andtheappropriatesupervisoryresponse,hasbeendevelopedtoensurethatthestockofliquidassetsisavailabletobeusedwhenneeded • Anumberofclarificationstotherulestexttopromoteconsistentapplicationandreducearbitrageopportunities(egoperationaldeposits BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  12. 12 fromwholesaleclients,derivativescashflows,openmaturityloans).AlsoincorporationofpreviouslyagreedFAQ Internationallyagreedphase-inoftheLCR -TheminimumLCRin2015wouldbe60%andincreaseby10percentagepointsperyeartoreach100%in2019 BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  13. 13 CommissionerMichelBarnier TheimpactofthelatestBaselCommitteeliquiditydevelopmentsforCapitalRequirements(CRD4)intheEU InthelightoftheGroupofGovernorsandHeadsofSupervisionmeeting andtheBaselCommitteeonBankingSupervisionpressreleasedated6January2013. "IwelcometheunanimousagreementreachedbytheBaselCommitteeontherevisedliquiditycoverageratioandthegradualapproachforitsphasing-inbyclearlydefineddates. ThisissignificantprogresswhichaddressesissuesalreadyraisedbytheEuropeanCommission. Wenowneedtomakefulluseoftheobservationperiod,andlearnfromthereportsthattheEuropeanBankingAuthoritywillprepareonthe resultsoftheobservationperiod,beforeformallyimplementingin2015theliquiditycoverageratiounderEUlawinlinewiththeBasel standards. Thetreatmentofliquidityisfundamental,bothforthestabilityofbanksaswellasfortheirroleinsupportingwidereconomicrecovery. InowcallupontheParliamentandtheCounciltosuccessfullyconcludetheCRD4triloguenegotiationsinthecomingweeks." Context TheBaselCommitteeonBankingSupervision(BCBS)hasagreedapackageofLCR(liquiditycoverageratio)revisionsunanimouslyaswellasits2013workplan. TheLCRrevisionsincludeanexpansionofeligibleassets,alessseverecalibrationforcertaincashflowsandaphasing-inarrangementfromJanuary2015to2019. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  14. 14 ThecurrentCommissionapproachtoliquidityintheCRD4negotiations,namelyfirstareportingperiodfollowedbycomprehensiveEuropeanBankingAuthority(EBA)ReportsandsubsequentlyadelegatedactbytheCommissiontodefinethedetailedratioremainsfullyvalid. Backgroundinformation TheCommission'sapproachtoliquidityinCRD4stillremainsvalidinthelightofthelatestBaselCommitteeapprovaloftherevisionofanumberofparametersandcalibrationsonliquidity(GHOSmeetingof6January). IntheBaselCommittee,theEuropeanCentralBank,theEuropeanCommissionandvariouscountriesincludingfromtheEUhadarguedforsucharevision. AttheleveloftheBaselCommittee,thefinalpackageofLCRrevisionswillnowbesubjecttoanobservationperiodwithaQuantitativeImpactStudy(QIS)thatwilltakeplacein2013togetherwithsomeotherimportantworkthatstillneedstobecompletedinthecomingyear. TheEUneedstotakefullbenefitofthisobservationperiodandlearnfromit,asthisisthefirsttimeinhistorythatregulatorsaredefininggloballyharmonized,quantitativeliquiditystandards. TheEBAwillmakereportsontheresultsoftheobservationperiodforEUbanksbeforetheendof2013. Basedontheevaluationofthiswork,theCommissionwillproposedefiningthedetailedLCRthroughadelegatedact(i.e.legislationadoptedbytheCommissionprovidednoobjectionsareraisedbytheEPandtheCouncil). Nevertheless,importantworkstillremainstobecompletedattheglobal andEuropeanlevels. Thisincludesthedeterminationofalternative,market-basedindicatorsforthedefinitionofHighQualityLiquidAssets(HQLA);thetreatmentofCentralBankfacilitieswhichcouldimpactuponthedefinitionofHQLAandrelatedcashflows;andthetreatmentofmarketvaluationchangesonderivativecashflows. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  15. 15 Inthislight,thebestcoursecontinuestoberapidadoptionoftheCRD4packagewhileleavingthenecessaryflexibilitytoimplementthefinaldetailedLCRstandardthroughadelegatedact,takingintoaccounttheon-goingworkbyBaselandthecomprehensiveEBAreports. Subjecttothisapproach,thetextsonthetablenowoftheEuropean ParliamentandCouncilshouldbeadoptedshortly,hopefullyinthecomingweeks. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  16. 16 BaselIII:TheLiquidityCoverageRatioandliquidityriskmonitoringtools,January2013 Introduction ThisdocumentpresentsoneoftheBaselCommittee’skeyreformstodevelopamoreresilientbankingsector:theLiquidityCoverageRatio(LCR). TheobjectiveoftheLCRistopromotetheshort-termresilienceoftheliquidityriskprofileofbanks. Itdoesthisbyensuringthatbankshaveanadequatestockofunencumberedhigh-qualityliquidassets(HQLA)thatcanbeconvertedeasilyandimmediatelyinprivatemarketsintocashtomeettheirliquidityneedsfora30calendardayliquiditystressscenario. TheLCRwillimprovethebankingsector’sabilitytoabsorbshocksarisingfromfinancialandeconomicstress,whateverthesource,thusreducingtheriskofspilloverfromthefinancialsectortotherealeconomy. ThisdocumentsetsouttheLCRstandardandtimelinesforitsimplementation. Duringtheearly“liquidityphase”ofthefinancialcrisisthatbeganin2007,manybanks–despiteadequatecapitallevels–stillexperienceddifficultiesbecausetheydidnotmanagetheirliquidityinaprudentmanner. Thecrisisdrovehometheimportanceofliquiditytotheproperfunctioningoffinancialmarketsandthebankingsector. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  17. 17 Priortothecrisis,assetmarketswerebuoyantandfundingwasreadilyavailableatlowcost. Therapidreversalinmarketconditionsillustratedhowquicklyliquiditycanevaporate,andthatilliquiditycanlastforanextendedperiodoftime. Thebankingsystemcameunderseverestress,whichnecessitatedcentralbankactiontosupportboththefunctioningofmoneymarketsand,insomecases,individualinstitutions. Thedifficultiesexperiencedbysomebankswereduetolapsesinbasicprinciplesofliquidityriskmanagement. Inresponse,asthefoundationofitsliquidityframework,theCommitteein2008publishedPrinciplesforSoundLiquidityRiskManagementandSupervision(“SoundPrinciples”). TheSoundPrinciplesprovidedetailedguidanceontheriskmanagementandsupervisionoffundingliquidityriskandshouldhelppromotebetterriskmanagementinthiscriticalarea,butonlyifthereisfullimplementationbybanksandsupervisors. Assuch,theCommitteewillcontinuetomonitortheimplementationbysupervisorstoensurethatbanksadheretothesefundamentalprinciples. Tocomplementtheseprinciples,theCommitteehasfurtherstrengtheneditsliquidityframeworkbydevelopingtwominimumstandardsforfundingliquidity. Thesestandardshavebeendevelopedtoachievetwoseparatebutcomplementaryobjectives. Thefirstobjectiveistopromoteshort-termresilienceofabank’sliquidityriskprofilebyensuringthatithassufficientHQLAtosurviveasignificantstressscenariolastingforonemonth. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  18. 18 TheCommitteedevelopedtheLCRtoachievethisobjective. Thesecondobjectiveistopromoteresilienceoveralongertimehorizon bycreatingadditionalincentivesforbankstofundtheiractivitieswithmorestablesourcesoffundingonanongoingbasis. TheNetStableFundingRatio(NSFR),whichisnotcoveredbythisdocument,supplementstheLCRandhasatimehorizonofoneyear. Ithasbeendevelopedtoprovideasustainablematuritystructureofassetsandliabilities. Thesetwostandardsarecomprisedmainlyofspecificparameterswhichareinternationally“harmonised”withprescribedvalues. Certainparameters,however,containelementsofnationaldiscretiontoreflectjurisdiction-specificconditions. Inthesecases,theparametersshouldbetransparentandclearlyoutlinedintheregulationsofeachjurisdictiontoprovideclaritybothwithinthejurisdictionandinternationally. ItshouldbestressedthattheLCRstandardestablishesaminimumlevelofliquidityforinternationallyactivebanks. BanksareexpectedtomeetthisstandardaswellasadheretotheSound Principles. ConsistentwiththeCommittee’scapitaladequacystandards,national authoritiesmayrequirehigherminimumlevelsofliquidity. Inparticular,supervisorsshouldbemindfulthattheassumptionswithin theLCRmaynotcaptureallmarketconditionsorallperiodsofstress. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  19. 19 Supervisorsarethereforefreetorequireadditionallevelsofliquiditytobeheld,iftheydeemtheLCRdoesnotadequatelyreflecttheliquidityrisksthattheirbanksface. GiventhattheLCRis,onitsown,insufficienttomeasurealldimensionsofabank’sliquidityprofile,theCommitteehasalsodevelopedasetofmonitoringtoolstofurtherstrengthenandpromoteglobalconsistencyinliquidityrisksupervision. ThesetoolsaresupplementarytotheLCRandaretobeusedforongoingmonitoringoftheliquidityriskexposuresofbanks,andincommunicatingtheseexposuresamonghomeandhostsupervisors. TheCommitteeisintroducingphase-inarrangementstoimplement theLCRtohelpensurethatthebankingsectorcanmeetthestandardthroughreasonablemeasures,whilestillsupportinglendingtotheeconomy. TheCommitteeremainsfirmlyoftheviewthattheLCRisanessentialcomponentofthesetofreformsintroducedbyBaselIIIand,whenimplemented,willhelpdeliveramorerobustandresilientbankingsystem. However,theCommitteehasalsobeenmindfuloftheimplicationsofthestandardforfinancialmarkets,creditextensionandeconomicgrowth,andofintroducingtheLCRatatimeofongoingstrainsinsomebankingsystems. IthasthereforedecidedtoprovideforaphasedintroductionoftheLCR,inamannersimilartothatoftheBaselIIIcapitaladequacyrequirements. Specifically,theLCRwillbeintroducedasplannedon1January2015,buttheminimumrequirementwillbesetat60%andriseinequalannualstepstoreach100%on1January2019. Thisgraduatedapproach,coupledwiththerevisionsmadetothe2010 BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  20. 20 publicationoftheliquiditystandards,aredesignedtoensurethattheLCRcanbeintroducedwithoutmaterialdisruptiontotheorderlystrengtheningofbankingsystemsortheongoingfinancingofeconomicactivity. • TheCommitteealsoreaffirmsitsviewthat,duringperiodsofstress,itwouldbeentirelyappropriateforbankstousetheirstockofHQLA,therebyfallingbelowtheminimum. • Supervisorswillsubsequentlyassessthissituationandwillgiveguidanceonusabilityaccordingtocircumstances. • Furthermore,individualcountriesthatarereceivingfinancialsupportformacroeconomicandstructuralreformpurposesmaychooseadifferentimplementationschedulefortheirnationalbankingsystems,consistentwiththedesignoftheirbroadereconomicrestructuringprogramme. • TheCommitteeiscurrentlyreviewingtheNSFR,whichcontinuestobesubjecttoanobservationperiodandremainssubjecttoreviewto addressanyunintendedconsequences. • ItremainstheCommittee’sintentionthattheNSFR,includinganyrevisions,willbecomeaminimumstandardby1January2018. • Thisdocumentisorganisedasfollows: • Part1definestheLCRforinternationallyactivebanksanddealswithapplicationissues. • Part2presentsasetofmonitoringtoolstobeusedbybanksandsupervisorsintheirmonitoringofliquidityrisks. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  21. 21 Part1:TheLiquidityCoverageRatio TheCommitteehasdevelopedtheLCRtopromotetheshort-termresilienceoftheliquidityriskprofileofbanksbyensuringthattheyhavesufficientHQLAtosurviveasignificantstressscenariolasting30calendardays. TheLCRshouldbeakeycomponentofthesupervisoryapproachtoliquidityrisk,butmustbesupplementedbydetailedsupervisoryassessmentsofotheraspectsofthebank’sliquidityriskmanagementframeworkinlinewiththeSoundPrinciples,theuseofthemonitoringtoolsincludedinPart2,and,induecourse,theNSFR. Inaddition,supervisorsmayrequireanindividualbanktoadoptmorestringentstandardsorparameterstoreflectitsliquidityriskprofileandthesupervisor’sassessmentofitscompliancewiththeSoundPrinciples. I.ObjectiveoftheLCRanduseofHQLA 16.ThisstandardaimstoensurethatabankhasanadequatestockofunencumberedHQLAthatconsistsofcashorassetsthatcanbeconvertedintocashatlittleornolossofvalueinprivatemarkets,tomeetitsliquidityneedsfora30calendardayliquiditystressscenario. Ataminimum,thestockofunencumberedHQLAshouldenablethebanktosurviveuntilDay30ofthestressscenario,bywhichtimeitisassumedthatappropriatecorrectiveactionscanbetakenbymanagementandsupervisors,orthatthebankcanberesolvedinanorderlyway. Furthermore,itgivesthecentralbankadditionaltimetotakeappropriatemeasures,shouldtheyberegardedasnecessary. AsnotedintheSoundPrinciples,giventheuncertaintimingofoutflowsandinflows,banksarealsoexpectedtobeawareofanypotentialmismatcheswithinthe30-dayperiodandensurethatsufficientHQLAareavailabletomeetanycashflowgapsthroughouttheperiod. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  22. 22 TheLCRbuildsontraditionalliquidity“coverageratio”methodologiesusedinternallybybankstoassessexposuretocontingentliquidityevents. Thetotalnetcashoutflowsforthescenarioaretobecalculatedfor30calendardaysintothefuture. Thestandardrequiresthat,absentasituationoffinancialstress,thevalueoftheratiobenolowerthan100%(iethestockofHQLAshouldatleastequaltotalnetcashoutflows)onanongoingbasisbecausethestockofunencumberedHQLAisintendedtoserveasadefenceagainstthepotentialonsetofliquiditystress. Duringaperiodoffinancialstress,however,banksmayusetheirstockofHQLA,therebyfallingbelow100%,asmaintainingtheLCRat100%undersuchcircumstancescouldproduceunduenegativeeffectsonthebankandothermarketparticipants. Supervisorswillsubsequentlyassessthissituationandwilladjusttheirresponseflexiblyaccordingtothecircumstances. Inparticular,supervisorydecisionsregardingabank’suseofitsHQLAshouldbeguidedbyconsiderationofthecoreobjectiveand definitionoftheLCR. Supervisorsshouldexercisejudgementintheirassessmentandaccountnotonlyforprevailingmacrofinancialconditions,butalsoconsiderforward-lookingassessmentsofmacroeconomicandfinancialconditions. Indeterminingaresponse,supervisorsshouldbeawarethatsomeactionscouldbeprocyclicalifappliedincircumstancesofmarket-widestress. Supervisorsshouldseektotaketheseconsiderationsintoaccountona consistentbasisacrossjurisdictions. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  23. 23 Supervisorsshouldassessconditionsatanearlystage,andtakeactionsifdeemednecessary,toaddresspotentialliquidityrisk. SupervisorsshouldallowfordifferentiatedresponsestoareportedLCRbelow100%. Anypotentialsupervisoryresponseshouldbeproportionatewiththedrivers,magnitude,durationandfrequencyofthereportedshortfall. Supervisorsshouldassessanumberoffirm-andmarket-specificfactorsindeterminingtheappropriateresponseaswellasother considerationsrelatedtobothdomesticandglobalframeworksandconditions. Potentialconsiderationsinclude,butarenotlimitedto: Thereason(s)thattheLCRfellbelow100%. ThisincludesuseofthestockofHQLA,aninabilitytorolloverfundingorlargeunexpecteddrawsoncontingentobligations. Inaddition,thereasonsmayrelatetooverallcredit,fundingandmarketconditions,includingliquidityincredit,assetandfundingmarkets,affectingindividualbanksorallinstitutions,regardlessoftheirowncondition; TheextenttowhichthereporteddeclineintheLCRisduetoafirm-specificormarket-wideshock; Abank’soverallhealthandriskprofile,includingactivities,positionswithrespecttoothersupervisoryrequirements,internalrisksystems,controlsandothermanagementprocesses,amongothers; Themagnitude,durationandfrequencyofthereporteddeclineofHQLA; BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  24. 24 ThepotentialforcontagiontothefinancialsystemandadditionalrestrictedflowofcreditorreducedmarketliquidityduetoactionstomaintainanLCRof100%; Theavailabilityofothersourcesofcontingentfundingsuchascentralbankfunding,orotheractionsbyprudentialauthorities. (d)SupervisorsshouldhavearangeoftoolsattheirdisposaltoaddressareportedLCRbelow100%. BanksmayusetheirstockofHQLAinbothidiosyncraticandsystemicstressevents,althoughthesupervisoryresponsemaydifferbetweenthetwo. Ataminimum,abankshouldpresentanassessmentofitsliquidityposition,includingthefactorsthatcontributedtoitsLCRfallingbelow100%,themeasuresthathavebeenandwillbetakenandtheexpectationsonthepotentiallengthofthesituation. Enhancedreportingtosupervisorsshouldbecommensuratewiththedurationoftheshortfall. Ifappropriate,supervisorscouldalsorequireactionsbyabanktoreduceitsexposuretoliquidityrisk,strengthenitsoverallliquidityriskmanagement,orimproveitscontingencyfundingplan. However,inasituationofsufficientlyseveresystem-widestress,effectsontheentirefinancialsystemshouldbeconsidered. Potentialmeasurestorestoreliquiditylevelsshouldbediscussed,andshouldbeexecutedoveraperiodoftimeconsideredappropriatetopreventadditionalstressonthebankandonthefinancialsystemasawhole. (e)Supervisors’responsesshouldbeconsistentwiththeoverallapproachtotheprudentialframework. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  25. 25 II.DefinitionoftheLCR 19.Thescenarioforthisstandardentailsacombinedidiosyncraticandmarket-wideshockthatwouldresultin: Therun-offofaproportionofretaildeposits; Apartiallossofunsecuredwholesalefundingcapacity; Apartiallossofsecured,short-termfinancingwithcertaincollateral andcounterparties; Additionalcontractualoutflowsthatwouldarisefromadowngradeinthebank’spubliccreditratingbyuptoandincludingthreenotches,includingcollateralpostingrequirements; Increasesinmarketvolatilitiesthatimpactthequalityofcollateralorpotentialfutureexposureofderivativepositionsandthusrequirelargercollateralhaircutsoradditionalcollateral,orleadtootherliquidityneeds; Unscheduleddrawsoncommittedbutunusedcreditandliquidityfacilitiesthatthebankhasprovidedtoitsclients;and Thepotentialneedforthebanktobuybackdebtorhonour non-contractualobligationsintheinterestofmitigatingreputationalrisk. Insummary,thestressscenariospecifiedincorporatesmanyoftheshocksexperiencedduringthecrisisthatstartedin2007intoonesignificantstressscenarioforwhichabankwouldneedsufficientliquidityonhandtosurviveforupto30calendardays. Thisstresstestshouldbeviewedasaminimumsupervisoryrequirementforbanks. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  26. 26 Banksareexpectedtoconducttheirownstressteststoassessthelevelofliquiditytheyshouldholdbeyondthisminimum,andconstructtheirownscenariosthatcouldcausedifficultiesfortheirspecificbusinessactivities. Suchinternalstresstestsshouldincorporatelongertimehorizonsthantheonemandatedbythisstandard. Banksareexpectedtosharetheresultsoftheseadditionalstresstestswithsupervisors. 22.TheLCRhastwocomponents: ValueofthestockofHQLAinstressedconditions;and Totalnetcashoutflows,calculatedaccordingtothescenarioparametersoutlinedbelow. A.StockofHQLA 23.ThenumeratoroftheLCRisthe“stockofHQLA”. Underthestandard,banksmustholdastockofunencumberedHQLAtocoverthetotalnetcashoutflows(asdefinedbelow)overa30-dayperiod undertheprescribedstressscenario. Inordertoqualifyas“HQLA”,assetsshouldbeliquidinmarketsduringatimeofstressand,ideally,becentralbankeligible. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  27. 27 Thefollowingsetsoutthecharacteristicsthatsuchassetsshouldgenerallypossessandtheoperationalrequirementsthattheyshouldsatisfy. 1.CharacteristicsofHQLA 24.AssetsareconsideredtobeHQLAiftheycanbeeasilyandimmediatelyconvertedintocashatlittleornolossofvalue. Theliquidityofanassetdependsontheunderlyingstressscenario,thevolumetobemonetisedandthetimeframeconsidered. Nevertheless,therearecertainassetsthataremorelikelytogeneratefundswithoutincurringlargediscountsinsaleorrepurchaseagreement(repo)marketsduetofire-salesevenintimesofstress. Thissectionoutlinesthefactorsthatinfluencewhetherornotthemarketforanassetcanbereliedupontoraiseliquiditywhenconsideredinthecontextofpossiblestresses. Thesefactorsshouldassistsupervisorsindeterminingwhichassets,despitemeetingthecriteriafromparagraphs49to54,arenotsufficientlyliquidinprivatemarketstobeincludedinthestockofHQLA. (i)Fundamentalcharacteristics -Lowrisk:assetsthatarelessriskytendtohavehigherliquidity. Highcreditstandingoftheissuerandalowdegreeofsubordinationincreaseanasset’sliquidity. Lowduration,lowlegalrisk,lowinflationriskanddenominationina convertiblecurrencywithlowforeignexchangeriskallenhanceanasset’sliquidity. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  28. 28 • Easeandcertaintyofvaluation:anasset’sliquidityincreasesifmarketparticipantsaremorelikelytoagreeonitsvaluation. • Assetswithmorestandardised,homogenousandsimplestructurestendtobemorefungible,promotingliquidity. • Thepricingformulaofahigh-qualityliquidassetmustbeeasytocalculateandnotdependonstrongassumptions. • Theinputsintothepricingformulamustalsobepubliclyavailable.Inpractice,thisshouldruleouttheinclusionofmoststructuredor • exoticproducts. • Lowcorrelationwithriskyassets:thestockofHQLAshouldnotbesubjecttowrong-way(highlycorrelated)risk. • Forexample,assetsissuedbyfinancialinstitutionsaremorelikelytobeilliquidintimesofliquiditystressinthebankingsector. • Listedonadevelopedandrecognisedexchange:beinglistedincreasesanasset’stransparency. • Market-relatedcharacteristics • Activeandsizablemarket:theassetshouldhaveactiveoutrightsaleorrepomarketsatalltimes. • Thismeansthat: • Thereshouldbehistoricalevidenceofmarketbreadthandmarketdepth. • Thiscouldbedemonstratedbylowbid-askspreads,hightradingvolumes,andalargeanddiversenumberofmarketparticipants. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  29. 29 • Diversityofmarketparticipantsreducesmarketconcentrationandincreasesthereliabilityoftheliquidityinthemarket. • Thereshouldberobustmarketinfrastructureinplace. • ThepresenceofmultiplecommittedmarketmakersincreasesliquidityasquoteswillmostlikelybeavailableforbuyingorsellingHQLA. • Lowvolatility:Assetswhosepricesremainrelativelystableandarelesspronetosharppricedeclinesovertimewillhavealowerprobabilityoftriggeringforcedsalestomeetliquidityrequirements. • Volatilityoftradedpricesandspreadsaresimpleproxymeasuresofmarketvolatility. • Thereshouldbehistoricalevidenceofrelativestabilityofmarketterms(egpricesandhaircuts)andvolumesduringstressedperiods. • Flighttoquality:historically,themarkethasshowntendenciestomoveintothesetypesofassetsinasystemiccrisis. • Thecorrelationbetweenproxiesofmarketliquidityandbankingsystemstressisonesimplemeasurethatcouldbeused. • 25.Asoutlinedbythesecharacteristics,thetestofwhetherliquidassetsareof“highquality”isthat,bywayofsaleorrepo,theirliquidity-generatingcapacityisassumedtoremainintacteveninperiodsofsevereidiosyncraticandmarketstress. • Lowerqualityassetstypicallyfailtomeetthattest. • Anattemptbyabanktoraiseliquidityfromlowerqualityassetsunder conditionsofseveremarketstresswouldentailacceptanceofalargefire-salediscountorhaircuttocompensateforhighmarketrisk. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  30. 30 Thatmaynotonlyerodethemarket’sconfidenceinthebank,butwouldalsogeneratemark-to-marketlossesforbanksholdingsimilarinstrumentsandaddtothepressureontheirliquidityposition,thusencouragingfurtherfiresalesanddeclinesinpricesandmarketliquidity. Inthesecircumstances,privatemarketliquidityforsuchinstrumentsislikelytodisappearquickly. HQLA(exceptLevel2Bassetsasdefinedbelow)shouldideallybeeligibleatcentralbanksforintradayliquidityneedsandovernightliquidityfacilities. Inthepast,centralbankshaveprovidedafurtherbackstoptothesupplyofbankingsystemliquidityunderconditionsofseverestress. Centralbankeligibilityshouldthusprovideadditionalconfidencethatbanksareholdingassetsthatcouldbeusedineventsofseverestresswithoutdamagingthebroaderfinancialsystem. Thatinturnwouldraiseconfidenceinthesafetyandsoundnessofliquidityriskmanagementinthebankingsystem. Itshouldbenotedhowever,thatcentralbankeligibilitydoesnotbyitselfconstitutethebasisforthecategorisationofanassetasHQLA. 2.Operationalrequirements 28.AllassetsinthestockofHQLAaresubjecttothefollowing operationalrequirements. Thepurposeoftheoperationalrequirementsistorecognisethatnotallassetsoutlinedinparagraphs49-54thatmeettheassetclass, risk-weightingandcredit-ratingcriteriashouldbeeligibleforthestockasthereareotheroperationalrestrictionsontheavailabilityofHQLAthatcanpreventtimelymonetisationduringastressperiod. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  31. 31 TheseoperationalrequirementsaredesignedtoensurethatthestockofHQLAismanagedinsuchawaythatthebankcan,andisabletodemonstratethatitcan,immediatelyusethestockofassetsasasourceofcontingentfundsthatisavailableforthebanktoconvertintocashthroughoutrightsaleorrepo,tofillfundinggapsbetweencashinflowsandoutflowsatanytimeduringthe30-daystressperiod,withnorestrictionontheuseoftheliquiditygenerated. Abankshouldperiodicallymonetisearepresentativeproportionoftheassetsinthestockthroughrepooroutrightsale,inordertotestitsaccesstothemarket,theeffectivenessofitsprocessesformonetisation,the availabilityoftheassets,andtominimisetheriskofnegativesignallingduringaperiodofactualstress. Allassetsinthestockshouldbeunencumbered. “Unencumbered”meansfreeoflegal,regulatory,contractualorotherrestrictionsontheabilityofthebanktoliquidate,sell,transfer,orassigntheasset. Anassetinthestockshouldnotbepledged(eitherexplicitlyorimplicitly)tosecure,collateraliseorcredit-enhanceanytransaction,norbedesignatedtocoveroperationalcosts(suchasrentsandsalaries). Assetsreceivedinreverserepoandsecuritiesfinancingtransactionsthatareheldatthebank,havenotbeenrehypothecated,andarelegallyandcontractuallyavailableforthebank'susecanbeconsideredaspartofthestockofHQLA. Inaddition,assetswhichqualifyforthestockofHQLAthathavebeenpre-positionedordepositedwith,orpledgedto,thecentralbankorapublicsectorentity(PSE)buthavenotbeenusedtogenerateliquiditymaybeincludedinthestock. Abankshouldexcludefromthestockthoseassetsthat,althoughmeetingthedefinitionof“unencumbered”specifiedinparagraph31,the BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  32. 32 bankwouldnothavetheoperationalcapabilitytomonetisetomeet outflowsduringthestressperiod. Operationalcapabilitytomonetiseassetsrequireshavingproceduresandappropriatesystemsinplace,includingprovidingthefunctionidentifiedinparagraph33withaccesstoallnecessaryinformationtoexecutemonetisationofanyassetatanytime. Monetisationoftheassetmustbeexecutable,fromanoperationalperspective,inthestandardsettlementperiodfortheassetclassintherelevantjurisdiction. Thestockshouldbeunderthecontrolofthefunctionchargedwithmanagingtheliquidityofthebank(egthetreasurer),meaningthefunctionhasthecontinuousauthority,andlegalandoperationalcapability,tomonetiseanyassetinthestock. Controlmustbeevidencedeitherbymaintainingassetsinaseparatepoolmanagedbythefunctionwiththesoleintentforuseasasourceofcontingentfunds,orbydemonstratingthatthefunctioncanmonetisetheassetatanypointinthe30-daystressperiodandthattheproceedsofdoingsoareavailabletothefunctionthroughoutthe30-daystressperiodwithoutdirectlyconflictingwithastatedbusinessorriskmanagementstrategy. Forexample,anassetshouldnotbeincludedinthestockifthesaleofthatasset,withoutreplacementthroughoutthe30-dayperiod,wouldremoveahedgethatwouldcreateanopenriskpositioninexcessofinternallimits. AbankispermittedtohedgethemarketriskassociatedwithownershipofthestockofHQLAandstillincludetheassetsinthestock. Ifitchoosestohedgethemarketrisk,thebankshouldtakeintoaccount(inthemarketvalueappliedtoeachasset)thecashoutflowthatwould BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  33. 33 ariseifthehedgeweretobeclosedoutearly(intheeventoftheassetbeingsold). InaccordancewithPrinciple9oftheSoundPrinciplesabank“shouldmonitorthelegalentityandphysicallocationwherecollateralisheldandhowitmaybemobilisedinatimelymanner”. Specifically,itshouldhaveapolicyinplacethatidentifieslegalentities,geographicallocations,currenciesandspecificcustodialorbankaccountswhereHQLAareheld. Inaddition,thebankshoulddeterminewhetheranysuchassetsshould beexcludedforoperationalreasonsandtherefore,havetheabilitytodeterminethecompositionofitsstockonadailybasis. Asnotedinparagraphs171and172,qualifyingHQLAthatareheldtomeetstatutoryliquidityrequirementsatthelegalentityorsub-consolidatedlevel(whereapplicable)mayonlybeincludedinthestockattheconsolidatedleveltotheextentthattherelatedrisks(asmeasuredbythelegalentity’sorsub-consolidatedgroup’snetcashoutflowsintheLCR)arealsoreflectedintheconsolidatedLCR. AnysurplusofHQLAheldatthelegalentitycanonlybeincludedintheconsolidatedstockifthoseassetswouldalsobefreelyavailabletotheconsolidated(parent)entityintimesofstress. Inassessingwhetherassetsarefreelytransferableforregulatorypurposes,banksshouldbeawarethatassetsmaynotbefreelyavailabletotheconsolidatedentityduetoregulatory,legal,tax,accountingorotherimpediments. Assetsheldinlegalentitieswithoutmarketaccessshouldonlybeincludedtotheextentthattheycanbefreelytransferredtootherentitiesthatcouldmonetisetheassets. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  34. 34 Incertainjurisdictions,large,deepandactiverepomarketsdonotexistforeligibleassetclasses,andthereforesuchassetsarelikelytobemonetisedthroughoutrightsale. Inthesecircumstances,abankshouldexcludefromthestockofHQLAthoseassetswherethereareimpedimentstosale,suchaslargefire-salediscountswhichwouldcauseittobreachminimumsolvencyequirements,orrequirementstoholdsuchassets,including,butnotlimitedto,statutoryminimuminventoryrequirementsformarketmaking. BanksshouldnotincludeinthestockofHQLAanyassets,orliquiditygeneratedfromassets,theyhavereceivedunderrightofrehypothecation,ifthebeneficialownerhasthecontractualrighttowithdrawthoseassetsduringthe30-daystressperiod. Assetsreceivedascollateralforderivativestransactionsthatarenotsegregatedandarelegallyabletoberehypothecatedmaybeincludedin thestockofHQLAprovidedthatthebankrecordsanappropriateoutflowfortheassociatedrisksassetoutinparagraph116. AsstatedinPrinciple8oftheSoundPrinciples,abankshouldactivelymanageitsintradayliquiditypositionsandriskstomeetpaymentandsettlementobligationsonatimelybasisunderbothnormalandstressedconditionsandthuscontributetothesmoothfunctioningofpaymentandsettlementsystems. BanksandregulatorsshouldbeawarethattheLCRstressscenariodoesnotcoverexpectedorunexpectedintradayliquidityneeds. WhiletheLCRisexpectedtobemetandreportedinasinglecurrency,banksareexpectedtobeabletomeettheirliquidityneedsineachcurrencyandmaintainHQLAconsistentwiththedistributionoftheirliquidityneedsbycurrency. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  35. 35 Thebankshouldbeabletousethestocktogenerateliquidityinthecurrencyandjurisdictioninwhichthenetcashoutflowsarise. Assuch,theLCRbycurrencyisexpectedtobemonitoredandreportedtoallowthebankanditssupervisortotrackanypotentialcurrencymismatchissuesthatcouldarise,asoutlinedinPart2. Inmanagingforeignexchangeliquidityrisk,thebankshouldtakeintoaccounttheriskthatitsabilitytoswapcurrenciesandaccesstherelevantforeignexchangemarketsmayeroderapidlyunderstressedconditions. Itshouldbeawarethatsudden,adverseexchangeratemovementscouldsharplywidenexistingmismatchedpositionsandaltertheeffectivenessofanyforeignexchangehedgesinplace. 43.Inordertomitigatecliffeffectsthatcouldarise,ifaneligibleliquidassetbecameineligible(egduetoratingdowngrade),abankispermittedtokeepsuchassetsinitsstockofliquidassetsforanadditional30calendardays. Thiswouldallowthebankadditionaltimetoadjustitsstockasneededorreplacetheasset. 3.DiversificationofthestockofHQLA 44.ThestockofHQLAshouldbewelldiversifiedwithintheassetclassesthemselves(exceptforsovereigndebtofthebank’shomejurisdictionorfromthejurisdictioninwhichthebankoperates;centralbankreserves;centralbankdebtsecurities;andcash). Althoughsomeassetclassesaremorelikelytoremainliquidirrespectiveofcircumstances,ex-anteitisnotpossibletoknowwithcertaintywhichspecificassetswithineachassetclassmightbesubjecttoshocksex-post. Banksshouldthereforehavepoliciesandlimitsinplaceinorderto BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  36. 36 avoidconcentrationwithrespecttoassettypes,issueandissuertypes,andcurrency(consistentwiththedistributionofnetcashoutflowsby currency)withinassetclasses. 4.DefinitionofHQLA ThestockofHQLAshouldcompriseassetswiththecharacteristicsoutlinedinparagraphs24-27. Thissectiondescribesthetypeofassetsthatmeetthesecharacteristicsandcanthereforebeincludedinthestock. Therearetwocategoriesofassetsthatcanbeincludedinthestock.Assetstobeincludedineachcategoryarethosethatthebankisholding onthefirstdayofthestressperiod,irrespectiveoftheirresidualmaturity. “Level1”assetscanbeincludedwithoutlimit,while“Level2”assetscanonlycompriseupto40%ofthestock. SupervisorsmayalsochoosetoincludewithinLevel2anadditionalclassofassets(Level2Bassets-seeparagraph53below). Ifincluded,theseassetsshouldcomprisenomorethan15%ofthetotalstockofHQLA. Theymustalsobeincludedwithintheoverall40%caponLevel2assets. The40%caponLevel2assetsandthe15%caponLevel2Bassetsshouldbedeterminedaftertheapplicationofrequiredhaircuts,andaftertakingintoaccounttheunwindofshort-termsecuritiesfinancingtransactionsandcollateralswaptransactionsmaturingwithin30calendardaysthatinvolvetheexchangeofHQLA. Inthiscontext,shorttermtransactionsaretransactionswithamaturitydateuptoandincluding30calendardays. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  37. 37 • ThedetailsofthecalculationmethodologyareprovidedinAnnex1. • (i)Level1assets • Level1assetscancompriseanunlimitedshareofthepoolandarenotsubjecttoahaircutundertheLCR. • However,nationalsupervisorsmaywishtorequirehaircutsforLevel1securitiesbasedon,amongotherthings,theirduration,creditandliquidityrisk,andtypicalrepohaircuts. • Level1assetsarelimitedto: • Coinsandbanknotes; • Centralbankreserves(includingrequiredreserves),totheextentthatthecentralbankpoliciesallowthemtobedrawndownintimesofstress; • Marketablesecuritiesrepresentingclaimsonorguaranteedbysovereigns,centralbanks,PSEs,theBankforInternationalSettlements,theInternationalMonetaryFund,theEuropeanCentralBankandEuropeanCommunity,ormultilateraldevelopmentbanks,andsatisfying allofthefollowingconditions: • assigneda0%risk-weightundertheBaselIIStandardisedApproachforcreditrisk; • tradedinlarge,deepandactiverepoorcashmarketscharacterisedbyalowlevelofconcentration; • haveaprovenrecordasareliablesourceofliquidityinthemarkets(repoorsale)evenduringstressedmarketconditions;and • notanobligationofafinancialinstitutionoranyofitsaffiliated entities. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  38. 38 • wherethesovereignhasanon-0%riskweight,sovereignorcentralbankdebtsecuritiesissuedindomesticcurrenciesbythesovereignorcentralbankinthecountryinwhichtheliquidityriskisbeingtakenorin thebank’shomecountry;and • wherethesovereignhasanon-0%riskweight,domesticsovereignorcentralbankdebtsecuritiesissuedinforeigncurrenciesareeligibleuptotheamountofthebank’sstressednetcashoutflowsinthatspecificforeigncurrencystemmingfromthebank’soperationsinthejurisdictionwherethebank’sliquidityriskisbeingtaken. • (ii)Level2assets • Level2assets(comprisingLevel2AassetsandanyLevel2Bassetspermittedbythesupervisor)canbeincludedinthestockofHQLA,subjecttotherequirementthattheycomprisenomorethan40%ofthe overallstockafterhaircutshavebeenapplied. • A15%haircutisappliedtothecurrentmarketvalueofeachLevel2AassetheldinthestockofHQLA. • Level2Aassetsarelimitedtothefollowing: • Marketablesecuritiesrepresentingclaimsonorguaranteedbysovereigns,centralbanks,PSEsormultilateraldevelopmentbanksthatsatisfyallofthefollowingconditions: • assigneda20%riskweightundertheBaselIIStandardisedApproachforcreditrisk; • tradedinlarge,deepandactiverepoorcashmarketscharacterisedbyalowlevelofconcentration; • haveaprovenrecordasareliablesourceofliquidityinthemarkets(repoorsale)evenduringstressedmarketconditions(iemaximum BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  39. 39 • declineofpricenotexceeding10%orincreaseinhaircutnotexceeding10percentagepointsovera30-dayperiodduringarelevantperiodofsignificantliquiditystress);and • -notanobligationofafinancialinstitutionoranyofitsaffiliated entities. • Corporatedebtsecurities(includingcommercialpaper)andcoveredbondsthatsatisfyallofthefollowingconditions: • inthecaseofcorporatedebtsecurities:notissuedbyafinancialinstitutionoranyofitsaffiliatedentities; • inthecaseofcoveredbonds:notissuedbythebankitselforanyofitsaffiliatedentities; • either • havealong-termcreditratingfromarecognisedexternalcreditassessmentinstitution(ECAI)ofatleastAA-21orintheabsenceofalongtermrating,ashort-termratingequivalentinqualitytothe • long-termrating;or • donothaveacreditassessmentbyarecognisedECAIbutareinternallyratedashavingaprobabilityofdefault(PD)correspondingtoacreditratingofatleastAA-; • tradedinlarge,deepandactiverepoorcashmarketscharacterisedbyalowlevelofconcentration;and • haveaprovenrecordasareliablesourceofliquidityinthemarkets(repoorsale)evenduringstressedmarketconditions:iemaximumdeclineofpriceorincreaseinhaircutovera30-dayperiodduringarelevantperiodofsignificantliquiditystressnotexceeding10%. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  40. 40 • (iii)Level2Bassets • Certainadditionalassets(Level2Bassets)maybeincludedinLevel2atthediscretionofnationalauthorities. • InchoosingtoincludetheseassetsinLevel2forthepurposeoftheLCR,supervisorsareexpectedtoensurethatsuchassetsfullycomplywiththequalifyingcriteria. • Supervisorsarealsoexpectedtoensurethatbankshaveappropriatesystemsandmeasurestomonitorandcontrolthepotentialrisks(egcreditandmarketrisks)thatbankscouldbeexposedtoinholdingtheseassets. • AlargerhaircutisappliedtothecurrentmarketvalueofeachLevel2BassetheldinthestockofHQLA. • Level2Bassetsarelimitedtothefollowing: • Residentialmortgagebackedsecurities(RMBS)thatsatisfyallofthefollowingconditionsmaybeincludedinLevel2B,subjecttoa25%haircut: • notissuedby,andtheunderlyingassetshavenotbeenoriginatedbythebankitselforanyofitsaffiliatedentities; • havealong-termcreditratingfromarecognisedECAIofAAorhigher,orintheabsenceofalongtermrating,ashort-termratingequivalentinqualitytothelong-termrating; • tradedinlarge,deepandactiverepoorcashmarketscharacterisedbyalowlevelofconcentration; • haveaprovenrecordasareliablesourceofliquidityinthemarkets(repoorsale)evenduringstressedmarketconditions,ieamaximumdeclineofpricenotexceeding20%orincreaseinhaircutovera30-day BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  41. 41 • periodnotexceeding20percentagepointsduringarelevantperiodofsignificantliquiditystress; • theunderlyingassetpoolisrestrictedtoresidentialmortgagesandcannotcontainstructuredproducts; • theunderlyingmortgagesare“fullrecourse’’loans(ieinthecaseof foreclosurethemortgageownerremainsliableforanyshortfallinsalesproceedsfromtheproperty)andhaveamaximumloan-to-valueratio(LTV)of80%onaverageatissuance;and • thesecuritisationsaresubjectto“riskretention”regulationswhichrequireissuerstoretainaninterestintheassetstheysecuritise. • Corporatedebtsecurities(includingcommercialpaper)thatsatisfyallofthefollowingconditionsmaybeincludedinLevel2B,subjecttoa50%haircut: • notissuedbyafinancialinstitutionoranyofitsaffiliatedentities; • either • (i)havealong-termcreditratingfromarecognisedECAIbetweenA+andBBB-orintheabsenceofalongtermrating,ashort-termratingequivalentinqualitytothelong-termrating;or • (ii)donothaveacreditassessmentbyarecognisedECAIandareinternallyratedashavingaPDcorrespondingtoacreditratingofbetweenA+andBBB-; • tradedinlarge,deepandactiverepoorcashmarketscharacterisedbyalowlevelofconcentration;and - haveaprovenrecordasareliablesourceofliquidityinthemarkets(repoorsale)evenduringstressedmarketconditions,ieamaximumdeclineofpricenotexceeding20%orincreaseinhaircutovera30-day BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  42. 42 • periodnotexceeding20percentagepointsduringarelevantperiodofsignificantliquiditystress. • CommonequitysharesthatsatisfyallofthefollowingconditionsmaybeincludedinLevel2B,subjecttoa50%haircut: • notissuedbyafinancialinstitutionoranyofitsaffiliatedentities; • exchangetradedandcentrallycleared; • aconstituentofthemajorstockindexinthehomejurisdictionorwheretheliquidityriskistaken,asdecidedbythesupervisorinthejurisdictionwheretheindexislocated; • denominatedinthedomesticcurrencyofabank’shomejurisdictionorinthecurrencyofthejurisdictionwhereabank’sliquidityriskistaken; • tradedinlarge,deepandactiverepoorcashmarketscharacterisedbyalowlevelofconcentration;and • haveaprovenrecordasareliablesourceofliquidityinthemarkets(repoorsale)evenduringstressedmarketconditions,ieamaximumdeclineofsharepricenotexceeding40%orincreaseinhaircutnotexceeding40percentagepointsovera30-dayperiodduringarelevantperiodofsignificantliquidity. • (iv)TreatmentforjurisdictionswithinsufficientHQLA • (a)Assessmentofeligibilityforalternativeliquidityapproaches(ALA) • 55.SomejurisdictionsmayhaveaninsufficientsupplyofLevel1assets(orbothLevel1andLevel2assets)intheirdomesticcurrencytomeettheaggregatedemandofbankswithsignificantexposuresinthiscurrency. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  43. 43 • Toaddressthissituation,theCommitteehasdevelopedalternativetreatmentsforholdingsinthestockofHQLA,whichareexpectedtoapplytoalimitednumberofcurrenciesandjurisdictions. • EligibilityforsuchalternativetreatmentwillbejudgedonthebasisofthequalifyingcriteriasetoutinAnnex2andwillbedeterminedthroughanindependentpeerreviewprocessoverseenbytheCommittee. • ThepurposeofthisprocessistoensurethatthealternativetreatmentsareonlyusedwhenthereisatrueshortfallinHQLAinthedomesticcurrencyrelativetotheneedsinthatcurrency. • Toqualifyforthealternativetreatment,ajurisdictionshouldbeabletodemonstratethat: • thereisaninsufficientsupplyofHQLAinitsdomesticcurrency,takingintoaccountallrelevantfactorsaffectingthesupplyof,anddemandfor,suchHQLA; • theinsufficiencyiscausedbylong-termstructuralconstraintsthatcannotberesolvedwithinthemediumterm; • ithasthecapacity,throughanymechanismorcontrolinplace,tolimitormitigatetheriskthatthealternativetreatmentcannotworkasexpected;and • itiscommittedtoobservingtheobligationsrelatingtosupervisorymonitoring,disclosure,andperiodicself-assessmentandindependentpeerreviewofitseligibilityforalternativetreatment. • Alloftheabovecriteriahavetobemettoqualifyforthealternativetreatment. • IrrespectiveofwhetherajurisdictionseekingALAtreatmentwilladoptthephase-inarrangementsetoutinparagraph10forimplementing BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  44. 44 theLCR,theeligibilityforthatjurisdictiontoadoptALAtreatmentwillbebasedonafullyimplementedLCRstandard(ie100%requirement). (b)Potentialoptionsforalternativetreatment 58.Option1–Contractualcommittedliquidityfacilitiesfromtherelevantcentralbank,withafee: ForcurrenciesthatdonothavesufficientHQLA,asdeterminedby referencetothequalifyingprinciplesandcriteria,Option1wouldallowbankstoaccesscontractualcommittedliquidityfacilitiesprovidedbytherelevantcentralbank(ierelevantgiventhecurrencyinquestion)forafee. Thesefacilitiesshouldnotbeconfusedwithregularcentralbankstandingarrangements. Inparticular,thesefacilitiesarecontractualarrangementsbetweenthecentralbankandthecommercialbankwithamaturitydatewhich,ataminimum,fallsoutsidethe30-dayLCRwindow. Further,thecontractmustbeirrevocablepriortomaturityandinvolvenoex-postcreditdecisionbythecentralbank. Suchfacilitiesareonlypermissibleifthereisalsoafeeforthefacilitywhichischargedregardlessoftheamount,ifany,drawndownagainstthatfacilityandthefeeissetsothatbankswhichclaimthefacilitylinetomeettheLCR,andbankswhichdonot,havesimilarfinancialincentivestoreducetheirexposuretoliquidityrisk. Thatis,thefeeshouldbesetsothatthenetyieldontheassetsusedtosecurethefacilityshouldnotbehigherthanthenetyieldonarepresentativeportfolioofLevel1andLevel2assets,afteradjustingforanymaterialdifferencesincreditrisk. AjurisdictionseekingtoadoptOption1shouldjustifyintheindependentpeerreviewthatthefeeissuitablysetinamannerasprescribedinthis BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  45. 45 paragraph. Option2–ForeigncurrencyHQLAtocoverdomesticcurrencyliquidityneeds: ForcurrenciesthatdonothavesufficientHQLA,asdeterminedby referencetothequalifyingprinciplesandcriteria,Option2wouldallowsupervisorstopermitbanksthatevidenceashortfallofHQLAinthedomesticcurrency(whichwouldmatchthecurrencyoftheunderlyingrisks)toholdHQLAinacurrencythatdoesnotmatchthecurrencyoftheassociatedliquidityrisk,providedthattheresultingcurrencymismatchpositionsarejustifiableandcontrolledwithinlimitsagreedbytheirsupervisors. Supervisorsshouldrestrictsuchpositionswithinlevelsconsistentwiththebank’sforeignexchangeriskmanagementcapacityandneeds,andensurethatsuchpositionsrelatetocurrenciesthatarefreelyandreliablyconvertible,areeffectivelymanagedbythebank,andwouldnotposeunduerisktoitsfinancialstrength. Inmanagingthosepositions,thebankshouldtakeintoaccounttherisksthatitsabilitytoswapcurrencies,anditsaccesstotherelevantforeignexchangemarkets,mayeroderapidlyunderstressedconditions. Itshouldalsotakeintoaccountthatsudden,adverseexchangeratemovementscouldsharplywidenexistingmismatchpositionsandaltertheeffectivenessofanyforeignexchangehedgesinplace. ToaccountforforeignexchangeriskassociatedwithforeigncurrencyHQLAusedtocoverliquidityneedsinthedomesticcurrency,suchliquidassetsshouldbesubjecttoaminimumhaircutof8%formajorcurrenciesthatareactiveinglobalforeignexchangemarkets. Forothercurrencies,jurisdictionsshouldincreasethehaircuttoan appropriatelevelonthebasisofhistorical(monthly)exchangeratevolatilitiesbetweenthecurrencypairoveranextendedperiodoftime. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  46. 46 Ifthedomesticcurrencyisformallypeggedtoanothercurrencyunderan effectivemechanism,thehaircutforthepeggedcurrencycanbeloweredtoalevelthatreflectsthelimitedexchangerateriskunderthepegarrangement. Toqualifyforthistreatment,thejurisdictionconcernedshould demonstrateintheindependentpeerreviewtheeffectivenessofitscurrencypegmechanismandassessthelong-termprospectofkeepingthepeg. HaircutsforforeigncurrencyHQLAusedunderOption2wouldapplyonlytoHQLAinexcessofathresholdspecifiedbysupervisorswhichisnotgreaterthan25%. Thisistoaccommodateacertainlevelofcurrencymismatchthatmay commonlyexistamongbanksintheirordinarycourseofbusiness. Option3–AdditionaluseofLevel2assetswithahigherhaircut:ThisoptionaddressescurrenciesforwhichthereareinsufficientLevel1assets,asdeterminedbyreferencetothequalifyingprinciplesandcriteria,butwheretherearesufficientLevel2Aassets. Inthiscase,supervisorsmaychoosetoallowbanksthatevidenceashortfallofHQLAinthedomesticcurrency(tomatchthecurrencyoftheliquidityriskincurred)toholdadditionalLevel2Aassetsinthestock. TheseadditionalLevel2Aassetswouldbesubjecttoaminimumhaircutof20%,ie5%higherthanthe15%haircutapplicabletoLevel2Aassetsthatareincludedinthe40%cap. ThehigherhaircutisusedtocoveranyadditionalpriceandmarketliquidityrisksarisingfromincreasedholdingsofLevel2Aassetsbeyondthe40%cap,andtoprovideadisincentiveforbankstousethisoptionbasedonyieldconsiderations. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  47. 47 SupervisorshavetheobligationtoconductananalysistoassesswhethertheadditionalhaircutissufficientforLevel2Aassetsintheirmarkets,andshouldincreasethehaircutifthisiswarrantedtoachievethepurposeforwhichitisintended. Supervisorsshouldexplainandjustifytheoutcomeoftheanalysis(includingthelevelofincreaseinthehaircut,ifapplicable)duringtheindependentpeerreviewassessmentprocess.AnyLevel2Bassetsheldbythebankwouldremainsubjecttothecapof15%,regardlessoftheamountofotherLevel2assetsheld. (c)Maximumlevelofusageofoptionsforalternativetreatment 63.Theusageofanyoftheaboveoptionswouldbeconstrainedbyalimitspecifiedbysupervisorsinjurisdictionswhosecurrencyiseligibleforthealternativetreatment. ThelimitshouldbeexpressedintermsofthemaximumamountofHQLAassociatedwiththeuseoftheoptions(whetherindividuallyorincombination)thatabankisallowedtoincludeinitsLCR,asapercentageofthetotalamountofHQLAthebankisrequiredtoholdinthecurrencyconcerned. HQLAassociatedwiththeoptionsreferto: InthecaseofOption1,theamountofcommittedliquidityfacilitiesgrantedbytherelevantcentralbank; InthecaseofOption2,theamountofforeigncurrencyHQLAusedtocovertheshortfallofHQLAinthedomesticcurrency;and InthecaseofOption3,theamountofLevel2assetsheld(includingthosewithinthe40%cap). 64.If,forexample,themaximumlevelofusageoftheoptionsissetat80%,itmeansthatabankadoptingtheoptions,eitherindividuallyorin BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  48. 48 combination,wouldonlybeallowedtoincludeHQLAassociatedwiththeoptions(afterapplyinganyrelevanthaircut)upto80%oftherequired amountofHQLAintherelevantcurrency. Thus,atleast20%oftheHQLArequirementwillhavetobemetbyLevel1assetsintherelevantcurrency. Themaximumusageoftheoptionsisofcoursefurtherconstrainedbythebank’sactualshortfallofHQLAinthecurrencyconcerned. 65.Theappropriatenessofthemaximumlevelofusageoftheoptionsallowedbyasupervisorwillbeevaluatedintheindependentpeerreview process. ThelevelsetshouldbeconsistentwiththeprojectedsizeoftheHQLAgapfacedbybankssubjecttotheLCRinthecurrencyconcerned,takingintoaccountallrelevantfactorsthatmayaffectthesizeofthegapovertime. Thesupervisorshouldexplainhowthislevelisderived,andjustifywhythisissupportedbytheinsufficiencyofHQLAinthebankingsystem. Wherearelativelyhighlevelofusageoftheoptionsisallowedbythesupervisor(egover80%),thesuitabilityofthislevelwillcomeundercloserscrutinyintheindependentpeerreview. (d)Supervisoryobligationsandrequirements 66.AjurisdictionwithinsufficientHQLAmust,amongotherthings,fulfilthefollowingobligations(thedetailedrequirementsaresetoutinAnnex2): -Supervisorymonitoring:Thereshouldbeaclearlydocumentedsupervisoryframeworkforoverseeingandcontrollingtheusageoftheoptionsbyitsbanks,andformonitoringtheircompliancewiththerelevantrequirementsapplicabletotheiruseoftheoptions; BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  49. 49 • Disclosureframework:Thejurisdictionshoulddiscloseitsframeworkforapplyingtheoptionstoitsbanks(whetheronitswebsiteorthroughothermeans). • Thedisclosureshouldenableothernationalsupervisorsandstakeholderstogainasufficientunderstandingofitscompliancewiththequalifyingprinciplesandcriteriaandthemannerinwhichitsupervisestheuseoftheoptionsbyitsbanks; • Periodicself-assessmentofeligibilityforalternativetreatment:Thejurisdictionshouldperformaself-assessmentofitseligibilityforalternativetreatmenteveryfiveyearsafterithasadoptedtheoptions,anddisclosetheresultstoothernationalsupervisorsandstakeholders. • SupervisorsinjurisdictionswithinsufficientHQLAshoulddeviserulesandrequirementsgoverningtheuseoftheoptionsbytheirbanks,havingregardtotheguidingprinciplessetoutbelow. • Principle1:Supervisorsshouldensurethatbanks’useoftheoptionsisnotsimplyaneconomicchoicethatmaximisestheprofitsofthebankthroughtheselectionofalternativeHQLAbasedprimarilyonyieldconsiderations.TheliquiditycharacteristicsofanalternativeHQLAportfoliomustbeconsideredtobemoreimportantthanitsnetyield. • Principle2:Supervisorsshouldensurethattheuseoftheoptionsisconstrained,bothforallbankswithexposuresintherelevantcurrencyandonabank-by-bankbasis. • Principle3:Supervisorsshouldensurethatbankshave,totheextentpracticable,takenreasonablestepstouseLevel1andLevel2assetsandreducetheiroveralllevelofliquidityrisktoimprovetheLCR,beforethealternativetreatmentcanbeapplied. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  50. 50 -Principle4:Supervisorsshouldhaveamechanismforrestrainingtheusageoftheoptionstomitigaterisksofnon-performanceofthealternativeHQLA. (v)TreatmentforShari’ahcompliantbanks 68.Shari’ahcompliantbanksfaceareligiousprohibitiononholdingcertaintypesofassets,suchasinterest-bearingdebtsecurities. EveninjurisdictionsthathaveasufficientsupplyofHQLA,aninsurmountableimpedimenttotheabilityofShari’ahcompliantbankstomeettheLCRrequirementmaystillexist. Insuchcases,nationalsupervisorsinjurisdictionsinwhichShari’ahcompliantbanksoperatehavethediscretiontodefineShari’ahcompliantfinancialproducts(suchasSukuk)asalternativeHQLAapplicabletosuchbanksonly,subjecttosuchconditionsorhaircutsthatthesupervisorsmayrequire. ItshouldbenotedthattheintentionofthistreatmentisnottoallowShari’ahcompliantbankstoholdfewerHQLA. TheminimumLCRstandard,calculatedbasedonalternativeHQLA(post-haircut)recognisedasHQLAforthesebanks,shouldnotbelowerthantheminimumLCRstandardapplicabletootherbanksinthejurisdictionconcerned. NationalsupervisorsapplyingsuchtreatmentforShari’ahcompliantbanksshouldcomplywithsupervisorymonitoringanddisclosureobligationssimilartothosesetoutinparagraph66above. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

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