Total Net Cash Outflows
In our previous post on the reforms being brought to the liquidity framework by Basel III, we had discussed the numerator of the first minimum funding liquidity ratio, LCR. In this post, we will cover the elements of the Liquidity Coverage Ratio denominator, i.e. the total net cash outflows over the next 30 calendar days. The formula for calculating total net cash outflows is:
Total expected cash outflows less Total expected cash inflows
Total expected cash outflows => Outstanding Liability Balances or off-balance sheet committments × Expected Run-off/ Draw down rates
Total expected cash inflows => Outstanding balances of contractual receivables × Expected Inflow rates
The total expected cash inflows are subject to a maximum value equal to 75% of the total expected cash outflows.
The expected run-off and inflow rates are influenced by the stress scenario assumed in the calculation of the ratio. This scenario was discussed in our introductory post on the Basel III Liquidity Framework.
Most of these rates or parameters are prescribed by the Basel Committee and have been calibrated to ensure international harmonization. However for some of the rates the discretion as to how they are set lies with the national supervisors of the jurisdictions in which the banks operate in.
Assets used as high quality liquid assets cannot be double counted as assets producing the cash inflows while cash outflows, if applicable to a number of cash outflow categories as mentioned below, are limited to the maximum amount that can be contractually paid out.
The following are some of the cash outflow and inflow categories together with their prescribed run-off (or inflow as the case may be) rates. Higher/ lower minimums for run-off/ inflow rates or additional categories together with their run-off/ inflow rates may be developed by national supervisors for banks operating in their jurisdictions. For a more detailed explanation of these cash outflow categories as well as their respective run-off/ drawdown rates you may like to see the Basel Committee’s published liquidity reforms document “International framework for liquidity risk measurement, standards and monitoring”.
Cash outflow categories
- Retail stable and less stable deposits will have minimum run off rates of 5% and 20% respectively
- Retail fixed term deposits having a maturity > 30 days and withdrawal penalties/ legal conditions will have a minimum run off rate of 0%
- Unsecured wholesale funding from stable and less stable small business customers will have minimum run off rates of 5% and 10% respectively
- Unsecured wholesale funding from legal entities with operational relationships will have a run off rate of 25% of deposits used for operational purposes only
- Unsecured wholesale funding from cooperative banks in an institutional network will have a run off rate of 25% of qualifying deposits with the centralized institution
- Unsecured wholesale funding from non-financial corporates, sovereigns, central banks and PSEs will have a run off rate of 75%
- Unsecured wholesale funding from all other legal entity customers will have run off rate of 100%
- Secured funding transactions backed by Level 1 assets and Level 2 assets will have a run off rate of 0% and 15% respectively
- Secured funding transactions not backed by Level 1 or 2 assets but with domestic sovereigns, central banks or PSEs with risk weights 20% or lower will have a run off rate of 25%
- All other secured funding transactions will have a run off rate of 100%
- Derivatives payable will have a 100% run off rate
- 100% loss of funding on asset backed securities and liabilities from asset backed commercial paper, conduits and securities investment vehicles
- 100% run off rate for liabilities containing down grade triggers that generate additional collateral calls for any downgrades up to 3 notches
- 20% run off rate for potential changes in valuations of posted collateral securing derivative transactions, where the collateral comprises of non-level 1 assets.
- Undrawn committed credit and liquidity facilities to retail and small business clients will have a drawn down rate of 5% each
- Undrawn committed credit and liquidity facilities to non-financial corporates, sovereigns, central banks, PSEs will have drawn down rates of 10% and 100% respectively
- Undrawn committed credit and liquidity facilities to other legal entity customers will have a drawn down rate of 100% each
- Other contractual cash outflows will have a run off rate of 100%
Cash inflow categories
- Reverse repos and securities borrowing backed by Level 1 assets, Level 2 assets or all other collateral will have inflow rates of 0%, 15% and 100% respectively
- Credit or liquidity facilities will have inflow rates of 0%
- Deposits held for operational purposes at other institutions will have inflow rates of 0%
- Amounts receivable from retail counterparties will have inflow rates of 50%
- Amounts receivable from non-financial wholesale counterparties will have inflow rates of 50%
- Amounts receivable from financial institution counterparties will have inflow rates of 100%
- Net derivatives receivables will have inflow rates of 100%
In our next post, we will present the second liquidity standard, the Net Stable Funding Ratio (NSFR).