Basel II Framework on Liquidity Standards: CAIIB Paper 2 (Module B), Unit 8

Basel II Framework on Liquidity Standards: CAIIB Paper 2 (Module B), Unit 8

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So, here we are providing “Unit 8: Basel II Framework on Liquidity Standards” of “Module B: Risk Management” from “Paper 2: Bank Financial Management (BFM)”


  • The LCR standard aims to ensure that a bank maintains an adequate level of unencumbered HQLA, that can be converted into cash to meet its liquidity needs for a 30 calendar day time horizon under a significantly severe liquidity stress scenario specified by supervisors. At a minimum, the stock of liquid assets should enable the bank to survive until day 30 of the stress scenario, by which time it is assumed that appropriate corrective actions can be taken.


  • To start with, the LCR and monitoring tools would be applicable for Indian banks at whole bank level only i.e. on a stand-alone basis including overseas operations through branches. However, banks should endeavour to move over to meeting the standard at consolidated level also. For foreign banks operating as branches in India, the framework would be applicable on stand-alone basis (i.e. for Indian operations only).


Calculation of LCR

  • As stated in the definition of LCR, it is a ratio of two factors, viz. the Stock of HQLA and the Net Cash Outflows over the next 30 calendar days. Therefore, computation of LCR of a bank will require calculations of the numerator and denominator of the ratio, as detailed in the RBI Circular.

Liquidity Risk Monitoring Tools

In addition to the two liquidity standards, the Basel III framework also prescribes five monitoring tools/ metrics for better monitoring a bank’s liquidity position. These metrics along with their objective and the prescribed returns are as under:

(a) Contractual Mismatch Maturity

The contractual maturity mismatch profile identifies the gaps between the contractual inflows and outflows of liquidity for defined time bands. These maturity gaps indicate how much liquidity a bank would potentially need to raise in each of these time bands if all outflows occurred at the earliest possible date. This metric provides insight into the extent to which the bank relies on maturity transformation under its current contracts.

(b) Concentration of Funding

This metric is meant to identify those sources of funding that are of such significance, the withdrawal of which could trigger liquidity problems. The metric thus encourages the diversification of funding sources recommended in the Basel Committee’s Sound Principles. This metrics aims to address the funding concentration of banks by monitoring their funding from each significant counterparty, each significant product/instrument and each significant currency.

(c) Available Unencumbered Assets

This metric provides supervisors with data on the quantity and key characteristics of banks’ available unencumbered assets. These assets have the potential to be used as collateral to raise additional secured funding in secondary markets and/or are eligible at central banks.

(d) LCR by Significant Currency

While the LCR standard is required to be met in one single currency, in order to better capture potential currency mismatches, the LCR in each significant currency needs to be monitored.

(e) Market-related Monitoring Tools

This includes high frequency market data that can serve as early warning indicators in monitoring potential liquidity difficulties at banks.

Basel III Liquidity Returns

S. No. Name of the Basel III Liquidity Return (BLR) Frequency of Submission Time Period by which Required to be Reported
1. Statement on Liquidity Coverage Ratio (LCR)-BLR-1 Monthly within 15 days
2. Statement of Funding Concentration- BLR- Monthly within 15 days
3. Statement of Available Unencumbered Assets – BLR-3 Quarterly within a month
4. LCR by Significant Currency – BLR-4 Monthly within a month
5. Statement on Other Information on Liquidity – BLR-5 Monthly within 15 days


Definition of the Standard Net Stable Funding Ratio

(Available Stable Funding (ASF))/Required Stable Funding (RSF)) x 100 = Should be 100%

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