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Basel III – Liquidity Framework – Metrics for monitoring liquidity risk

Besides the two supervisory standards proposed in the Basel III liquidity reforms, the liquidity framework also presents 5 metrics that would be used by banks to monitor their liquidity position on a consistent basis. National supervisory authorities have the discretion of suggesting additional measures that could be used to monitor liquidity as well as act as early warning indicators of liquidity stress.

The measures mentioned in the Basel III document are:

Contractual maturity mismatch

This presents the contractual cash and security inflows and outflows from all on- and off- balance sheet items for each defined maturity time band. It is used to identify the maturity gaps and mismatches for each maturity time band defined.

Concentration of funding

There are three metrics measured within this tool, one each for assessing wholesale funding concentrations by counterparty, product/ instrument and currency. It is used to identify significant sources of funding that if withdrawn could lead to a liquidity crisis for the bank. Significant funding sources, by counterparty or product, are assumed to be those having a value greater than 1% of the bank’s total balance sheet, whereas by currency, it is assumed to be those with aggregate liabilities denominated in that currency > 5% of the bank’s total liabilities. The specific metrics are calculated as follows:

By counterparty: Funding Liabilities sourced from each significant counterparty/Balance Sheet Total

By product: Funding Liabilities sourced from each significant product/Balance Sheet Total

By currency: Asset and Liabilities amounts by significant currency

Available unencumbered assets

This is a report of the amount, currency, type and location of, and estimated haircuts applicable to, available unencumbered assets which can be used as collateral in the secondary markets and/ or are central bank eligible.

LCR by significant currency

This metric allows banks and supervisors to track potential currency mismatches under a stress scenario. It is given by the following ratio.

Foreign Currency LCR = Value of stock of high-quality liquid assets in each significant currency/Total net cash outflow over the next 30-day period in each significant currency

Market-related monitoring tools

This involves the use of high frequency market data, having little or no time lag, to identify signs of potential liquidity stress. This data is to be monitored at the following levels:

Market-wide

  • Equity prices
  • Debt markets
  • Foreign exchange markets
  • Commodities markets
  • Product indices

Financial sector

  • Equity prices
  • Debt markets
  • Product indicies
  • Bank-specific
    • Equity prices
    • CDS/ credit spreads
    • Money-market trading prices
    • Rollovers and prices by funding length
    • Yield on bank-issued debt

    For a more detail review of the objectives, definitions of metric and important terminology, assumptions, and use, interpretation and limitations of the metric you may like to see the Basel Committee’s published liquidity reforms document “International framework for liquidity risk measurement, standards and monitoring”.

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