Basel III - Liquidity ratios

February 13, 2013

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Views or opinions in this presentation are solely those of the presenter and do not necessarily represent those of ICICI Bank Limited

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Background Basel Committee of Banking Supervision (BCBS) had

proposed two liquidity ratios in December 2009

Liquidity coverage ratio (LCR) High quality liquid assets available to meet net

cash outflows for a 30 day time horizon under stress scenario

Net stable funding ratio (NSFR) Requires minimum stable funding over a 1 year

horizon based on liquidity risk factors assigned to assets and off-balance sheet liquidity exposure

Quantitative Impact Study (QIS) to analyse impact of liquidity ratios started from March 2011

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Liquidity coverage ratio (LCR)

Definition: Stock of high quality liquid assets Net cash outflows over a 30 day period

Minimum level of 60% to be maintained by 2015 with a 10% increase every year till 100% in 2019

Both systemic shocks and institution specific stress considered to arrive at net cash outflows

Net cash outflows

Liquid assets

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Net stable funding ratio (NSFR)

DefinitionAvailable amount of stable fundingRequired amount of stable funding

Minimum level of 100% to be maintained by 2018

To lead to structural change in liquidity risk profiles towards longer term stable funding

Available stable funding

Required stable funding

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Key challenges Treatment of CRR/SLR as a part of liquid asset

Significant portion of CRR/SLR not allowed to be considered as liquid assets

Customer term deposits have premature withdrawal Due to premature withdrawal option, higher

outflows are considered in LCR computation and lower stable funding factor in NSFR computation

Lower proportion of insured deposits Insured deposits forms small portion of the total

deposit base, leading to higher outflows in the LCR computation

RBI - Liquidity GuidelinesIssued on November 7, 2012

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Governance of liquidity risk management Board should decide the strategy, policies &

procedures to manage liquidity risk

Understand the nature of liquidity risk of the bank, including branches, subsidiaries & associates

Liquidity risk management policy to cover material subsidiaries, JVs & associates

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Management of liquidity risk (1/2) Banks should have sound process to identify,

measure, monitor & mitigate liquidity risk

Extend liquidity gap limits currently applicable for domestic-INR gaps to overseas operations (country-wise)

Liquidity gap statement for overseas branches to be prepared daily

Recommended to be extended to consolidated domestic operations (INR & FC) & consolidated Bank operations

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Management of liquidity risk (2/2) Short-term dynamic liquidity gap statement to be

extended to overseas branch operations (jurisdiction wise and overall)

Assumptions used in cash flow projections should be transparent to the Board/Risk Committee and reviewed periodically

Set of illustrative liquidity ratios provided for domestic operations and also for major currencies viz. USD, GBP, EUR and JPY.

Ratios are only illustrative and banks can also use other measures/ratios

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Overseas operations of Indian bank’s branches & subsidiaries Banks should provide detailed procedures &

guidelines for their overseas branches / subsidiaries to manage their operational liquidity on an ongoing basis

Monitor two ratios for overseas operations (consolidated & separately for currencies >10% of

consolidated overseas balance sheet) Long & medium term resources/long & medium

term assets Long term resources to long term assets ratios

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Stress testing

Conduct stress tests on various short term & protracted bank specific & market-wide stress scenarios Individually & in combination

Stress test results should assist bank’s contingent funding planning and form strategy to deal liquidity stress situation

Risk tolerance may also be expressed in terms of minimum survival horizons

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Contingency funding plan (CFP)

Banks to formulate CFP to respond to severe disruptions, which might affect the bank’s ability to fund some or all of its activities in a timely manner and at a reasonable cost

Contingency plans must be tested regularly to ensure their effectiveness and operational feasibility

To be reviewed by the Board at least on an annual basis

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Collateral position management

Maintain sufficient collateral for expected & unexpected borrowings, increased margin requirements, and pledging/delivery of additional intra-day collateral in case of operational/liquidity disruption

Have systems & procedures in place to assess/compute collateral requirements, pledged assets & unencumbered assets

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Intra-day liquidity position management

Banks to monitor intra-day liquidity requirements

Have policies, procedures and systems to support intra-day liquidity risk management in all financial markets and currencies in which it has significant flows

Develop and adopt an intra-day liquidity strategy to monitor and measure expected daily gross liquidity flows

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Thank you