IMPLEMENTATION OF BASEL III LIQUIDITY RATIOS. REF: DOS CIRCULAR NO. 01 DATED 01.01.2015.

Bangladesh Bank has declared the road map for implementing the Revised Regulatory Capital Framework for banks in line with Basel III in Bangladesh starting from the year 2015. According to the revised road map issued vide BRPD CIRCULAR NO. 18 DATED 21.12.2014, banks have to maintain the minimum standard Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) from January 2015. The minimum standard for LCR shall be greater than or equal to 100 and for NSFR it shall be greater than 100. It may be mentioned that, all scheduled banks are already familiar with these ratios since they have reported these several times, although in an experimental basis, in 2014. In order to further facilitate the reporting process, a “Guidance Note on Liquidity Coverage Ratio (LCR) & Net Stable Funding Ratio (NSFR)” is attached with this circular (Annexure-1). Banks have to submit information (both soft and hard copy) to Department of Off-site Supervision (DOS) regarding LCR and NSFR in the following manner:

  1. a) Statement Regarding Liquidity Position – to be submitted monthly, based on the balances of last day of the reporting month, within 15th of the following month.
  2. b) Statement Regarding Funding Position – to be submitted quarterly, based on the balances of last day of the reporting quarter , within 15th of the following month.

Two reporting formats (Macro) have been prepared for this purpose and banks are advised to collect the formats from DOS.

This circular is issued with immediate effect.

Guidance Note on Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) Liquidity Coverage Ratio:

Liquidity Coverage Ratio:

LCR or Liquidity Coverage Ratio is a new liquidity standard introduced by the Basel Committee. This standard is built on the methodologies of traditional liquidity coverage ratio used by banks to assess exposure to contingent liquidity events. LCR aims to ensure that a bank maintains an adequate level of unencumbered, high-quality liquid assets that can be converted into cash to meet its liquidity needs for 30 calendar days. LCR goes beyond measuring the need for liquid assets over the next 30 days in a normal environment. It measures the need for liquid assets in a stressed environment, in which deposits and other sources of funds (both unsecured and secured) run off, to various extents, and unused credit facilities are also drawn down in various magnitudes. These runoffs are in addition to contractual outflows.

The equation:

LCR=(Stock of high quality liquid assets/Total net cash outflows over the next 30 calendar days)>=100%

Definitions for the LCR:

The calculation of the LCR requires three important quantities to be defined:

  1. Total value of stock of high quality liquid assets
  2. Total cash outflows, next 30 days (stressed scenario)
  3. Total cash inflows, next 30 days (stressed scenario)

LCR requirement is met if A is greater than B – C; that is, if high quality liquid assets exceed net cash outflows under the stressed scenario. (To make the metric even more conservative, C is capped at 75 percent of B.)

Stock of high quality liquid asset (SHQLA):

The following components are included in the computation of SHQLA –

  1. Cash on hand (Lcy + Fcy)
  2. Balance with BB (Lcy+ Fcy, excluding lien)
  3. Un-encumbered approved securities (excluding lien)

Capital maintained with BB by the foreign banks in the form of local currency, foreign currency or Govt. securities will not be included in the computation of SHQLA (Stock of high quality liquid asset).

Net Stable Funding Ratio:

NSFR or Net Stable Funding Ratio is another new standard introduced by the Basel Committee. The NSFR aims to limit over-reliance on short-term wholesale funding during times of abundant market liquidity and encourage better assessment of liquidity risk across all on- and off-balance sheet items. The minimum acceptable value of this ratio is 100 percent, indicating that available stable funding (ASF) should be at least equal to required stable funding (RSF). ASF consists of various kinds of liabilities and capital with percentage weights attached given their perceived stability. RSF consists of assets and off-balance sheet items, also with percentage weights attached given the degree to which they are illiquid or “long-term” and therefore requires stable funding. The time horizon of the NSFR is one year. Like the LCR, the NSFR calculations assume a stressed environment.

The equation:

NSFR=(Available amount of stable funding (ASF)/Required amount of stable funding (RSF)>100%

Definitions of the NSFR:

The calculation of the NSFR requires two quantities to be defined:

  1. available stable funding (ASF) and
  2. required stable funding (RSF).

NSFR is met if ASF exceeds RSF, that is if ASF/RSF > 1 or 100%.

To facilitate the calculation and reporting of LCR and NSFR, Bangladesh Bank will provide a reporting template (macro) with necessary instructions. The standard “Run-off factors” and “Weight factors” are generally applicable for all banks, which for the time being are not disclosed. Banks are advised to develop methodology to determine their own “Run-off factors” and “Weight factors” for future use.

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