, , , ,

“EBA FINAL draft Implementing Technical Standards on supervisory reporting under Regulation (EU) No 575/2013”, 26 July 2013, states that the Liquidity Coverage Ratio (LCR) has 31.03. 2014 as first reporting reference date, which is getting closer. But how should we get the reported values?

According to bcbs238 (“Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools”, January 2013), one has to also look at the calculations of

  • credit risk: in credit risk calculations the negative exposure (we own to the counterparty) is set to zero, as it does not have an impact if the counterparty defaults. However, via the LCR, this negative exposure has to be considered as net cash outflow:

120. Increased liquidity needs related to excess non-segregated collateral held by the bank that could contractually be called at any time by the counterparty: 100% of the non-segregated collateral that could contractually be recalled by the counterparty because the collateral is in excess of the counterparty’s current collateral requirements.

  • market risk: if Option 1 is activated, we can borrow the missing amount of  High quality liquid assets (HQLA) at a fee, from a central bank. While the credit risk is technically not impacted by these new contracts, they will impact and generate market risk (interest rate and foreign exchange risks):

58. Option 1 – Contractual committed liquidity facilities from the relevant central bank, with a fee: For currencies that do not have sufficient HQLA, as determined by reference to the qualifying principles and criteria, Option 1 would allow banks to access contractual committed liquidity facilities provided by the relevant central bank (ie relevant given the currency in question) for a fee.

These two requirements imply an integrated credit, liquidity and market risk modelling in order to obtain consistent results.