CAPITAL & LIQUIDITY

•HOW LIQUID IS YOUR UNDERSTANDING?     

Highly liquid assets are held by financial institutions in order to meet short-term obligations. The Liquidity coverage ratio (LCR) is designed to ensure that financial institutions have the necessary assets on hand to ride out short-term liquidity disruptions. Banks are required to hold an amount of highly-liquid assets, such as cash or Treasury bonds, equal to or greater than their net cash over a 30 day period (having at least 100% coverage). The LCR started to be regulated and measured in 2011, but the full 100% minimum will not be enforced until 2015.

So how does the current Individual Liqudity Guidance (ILG) compare to the LCR?

			LCR		ILG
Coverage Period			1 month		3 months
Coverage %			100% Fixed		100%
Calculation Criteria			Output & Input Cash = Net Output Cash – Rollover Adjustment Not Included		Output Cash = Gross Output Cash – Rollover Adjustment Included
% Reported			100% Fixed		Proportion of Primary Assets/ 3 months outflow
Results driven			100% drives liquidity requirement		The liquidity requirement drives the %
Stable Vs Less Stable Deposits			Yes		Yes
Stable Vs Less Stable Deposits			FSA % Applied		No %

The Net Stable Funding Ratio (NSFR) seeks to calculate the proportion of long term assets which are funded by long term, stable funding. This ratio has been proposed within Basel III, which will over time replace Basel II.

• "Stable Funding" includes: customer deposits, long-term wholesale funding (from the Interbank lending market), and Equity.
• "Stable Funding" excludes short-term wholesale funding (also from the Interbank lending market).

 The components of "Stable Funding" is defined as the total amount of:

• Capital;
• Preferred stock with maturity of equal to or greater than one year;
• Liabilities with effective maturities of one year or greater;
• That portion of non-maturity deposits and/or term deposits with maturities of less than one year that would be expected to stay with the institution for an extended period in an idiosyncratic stress event; and
• The portion of wholesale funding with maturities of less than a year that is expected to stay with the institution for an extended period in an idiosyncratic stress event.”

In simple terms, the NSFR can be calcuated as:

"AVAILABLE AMOUNT OF STABLE FUNDING / REQUIRED AMOUNT OF STABLE FUNDING > 100%"



•TREASURY IMPACT?

Corporate treasury departments will not be the only businesses to be affected by the conversion from IAS 39 to IFRS 9. Treasury System Suppliers will find that their products may no longer be IFRS compliant. We can help, by reviewing and advising on how to manage these changes:

•Review and provide advice on your Liqudity policy.
•Review and provide advice on your liquidity calculations.
•Review and provide advice on your liquidity system parameters.
•Build an intergrated liquidity model (forecasts etc) for your business.

•Liquidity Training.
 

Please click HERE to email us for a free LCR and NSFR calcuation templates (excel).

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