RBI revises Basel III Framework on Liquidity Standards for reckoning Liquidity Coverage Ratio (LCR)

RBI on Monday through notification announced that “it has been decided to permit banks to reckon Government securities as Level 1 HQLA* under FALLCR** within the mandatory SLR requirement up to 16 percent of their NDTL, under Basel III Framework on Liquidity Standards.

Consequently, the total HQLA carve-out from the mandatory SLR, which can be reckoned for meeting LCR requirement will be 18 percent of NDTL (2 percent MSF plus 16 percent FALLCR)”.

The liquidity coverage ratio (LCR) refers to highly liquid assets held by financial institutions to meet short-term obligations.  LCR forms on traditional liquidity “coverage ratio” methodologies used internally by banks to assess exposure to contingent liquidity events. The LCR guidelines ensure a reduction in funding risk over a 30 days horizon by requiring banks to fund their activities with sufficiently stable sources of funding in order to mitigate the risk of future funding stress. The standard requires that, absent in a situation of financial stress, the value of the ratio should not be lower than 100%.

That is;

[Stock of high-quality liquid assets (HQLA)] ÷ [Net Cash outflows over a 30 days time period] ≥100%

In the other words, the stock of HQLA should at least equal to or more than total net cash outflows is the standard requirement for LCR. (The HQLA includes only those with a high potential to be converted easily and quickly into cash).

* RBI allows a limited portion of government securities used to meet the SLR to be recognised as HQLA Level 1 for calculating LCR inter alia, including (a) Government securities in excess of the mandatory SLR requirement and (b) within the mandatory SLR requirement, Government securities to the extent allowed under (i) Marginal Standing Facility (MSF) and (ii) Facility to Avail Liquidity for Liquidity Coverage Ratio (FALLCR)** [15 percent of the banks’ Net Demand and Time Liabilities (NDTL)]. It means The HQLA includes only those with a high potential to be converted easily and quickly into cash).

**FALLCR is that part of the G-secs under SLR that can be pledged to raise liquid assets to meet LCR requirements under BASEL III. What this means is that when a bank invests in G-secs, to meet their SLR requirement, these securities can also be pledged to raise liquidity as HQLA for meeting the LCR In view of  “MSF has been reduced to 2 percent from 3 percent of NDTL from January 1, 2022, the total HQLA carve-out from the mandatory SLR, which can be reckoned for meeting LCR requirement, has reduced to 17 percent of NDTL (2 percent MSF plus 15 percent FALLCR) from 18 percent”, RBI said. “This circular of the central bank is applicable to all Commercial Banks other than Regional Rural Banks, Local Area Banks, and Payments Banks”, it said