Liquidity Functional Knowledge

The NSFR is expressed as a ratio that must equal or exceed 100%. The ratio relates the bank's available stable funding to its required stable funding, as summarised in the following formula:

The ALMM has been designed to supplement the information about banks’ liquidity that is already captured by the Liquidity Coverage Ratio (LCR). There is an overlap between the data that is needed to produce both reports. However, the ALMM also requires a lot of granular data that is not needed for the LCR, including information about a bank’s top ten counterparties and top ten types of funding across a multitude of maturity buckets.

Given the close relationship between the LCR and ALMM, banks should use a single platform to manage both requirements. This will allow them to avoid processing a lot of the same data twice when producing the LCR and ALMM. It will also ensure consistency and cross-validation between the data in both reports.

The LCR measures a bank’s liquidity risk profile,  banks have an adequate stock of unencumbered high-quality  liquid assets that can be easily and immediately converted  in financial markets, at no or little loss of value. This category would include, for example, central bank deposits, corporate promissory notes or guaranteed bonds. The goal is to ensure that the institution can meet its liquidity needs for a 30 day hypothetical financial stress scenario.

The LCR is the percentage resulting from dividing the bank’s stock of high-quality assets by the estimated total net cash outflows over a 30 calendar day stress scenario.  Total net cash outflows is defined as the total expected cash outflows minus total expected cash inflows (up to an aggregate cap of 75% of total expected cash outflows).

stock of high-quality assets

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estimated total net cash outflows 

IRRBB refers to the current or prospective risk to the bank’s capital and earnings arising from adverse movements in interest rates that affect the bank’s banking book positions. 

LCR: Objective: To promote the short term resilience of the liquidity risk profile of banks.

Ensures that banks have an adequate stock of unencumbered high-quality liquid assets. (HQLA) that can be converted easily and immediately into cash to meet their liquidity needs for a 30 calendar day liquidity stress scenario

LCR = Stock of HQLA / Total net cash outflows over next 30 days calendar days >= 100%

HQLA must be liquid in markets in a time of stress and ideally central bank eligible

Net cash outflow = Total expected cash outflows - Min (total expected cash inflows; 75% of total expected cash outflows)

LCR HQLA - limited to certain asset type catogorized as Level 1 , 2a or 2b

Level 1 assets 

• coins and banknotes

• Central bank reserves

• Marketable securities (assigned 0% risk weight)

=> LCR weighting at 100%

Level 2a assets  

• Marketable securities (assigned 20% risk weight)

• Non financial corporate bonds rated AA- or better

• Covered Bonds rated AA- or better

=> LCR weighting at 85%

Level 2b assets

Qualifying common equity shares 

Qualifying RMBS rated AA or better 

Corporate debt securities rates between A+ or BBB0  

=> LCR Weighting at 50%

Unencumbered

Assets must be free of legal, regulatory m contractual or other restrictions on the ability of bank to liquidate , sell , transfer or assign the asset

• Pledged assets

• Assets held for hedging or trading purposes

• Segregated client accounts 

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