Basel 3 January 2013

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We had such an interestingmonth… and the most interestingdayswere
just after the first week of themonth, whenwecould read the amended
liquiditystandards…
Basel III - Group of Governorsand Heads
of Supervision endorsesrevised liquidity
standard for banks
6January 2013
TheGroup of Governorsand Headsof
Supervision(GHOS), the oversight bodyof the
Basel Committeeon BankingSupervision, met
todayto consider the Basel Committee's
amendmentstotheLiquidityCoverageRatio
(LCR) asa minimum standard.
It unanimouslyendorsedthem.
Basel iii ComplianceProfessionalsAssociation (BiiiCPA)
www.basel-iii-association.com

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Today's agreement isa clear commitment toensurethat banks hold
sufficient liquid assetsto prevent central banksbecoming the"lender of
first resort".
TheGHOSalsoendorseda new Charter for the Committee, and
discussedthe Committee'smedium-term workagenda.
TheGHOSreaffirmedthe LCR asan essentialcomponent of the Basel
III reforms.
It endorsed a packageof amendmentstothe formulation of the LCR
announced in 2010.
Thepackage hasfour elements:
1.Revisionstothedefinitionofhigh qualityliquidassets(HQLA) andnet
cashoutflows
2. Atimetablefor phase-inof the standard
3.Areaffirmationoftheusability of thestockof liquid assetsin periodsof
stress,includingduringthe transition period
4. An agreement for the BaselCommitteeto conduct furtherworkon the
interaction betweenthe LCR and theprovision of central bank facilities.
Asummary description of the agreed LCR is inAnnex 1.
Thechangestothedefinitionof the LCR, developed and agreed by the
Basel Committeeover the past twoyears, includean expansion in the
rangeof assetseligibleasHQLAand some refinementsto theassumed
inflowand outflowratestobetter reflect actual experiencein timesof
stress.
Thesechangesare set out inAnnex 2.

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TheGHOSagreedthat the LCR should be subject to phase-in
arrangementswhichalign withthosethat applyto the BaselIII capital
adequacyrequirements.
Specifically, the LCR will be introduced as planned on 1January 2015, but
the minimum requirement will begin at 60%, rising in equal annual steps
of 10percentagepointstoreach 100% on 1January 2019.
This graduated approach isdesigned toensure that theLCR can be
introduced without disruption to the orderlystrengtheningof banking
systemsor the ongoing financingof economic activity.
TheGHOSagreedthat, during periodsof stressit wouldbeentirely
appropriatefor banksto usetheir stock of HQLA, therebyfallingbelow
theminimum.
Moreover,it is the responsibilityof bank supervisorstogive guidanceon
usabilityaccordingtocircumstances.
TheGHOSalsoagreed todaythat, sincedepositswithcentral banks are
themost - indeed, in some cases, the only - reliableform of liquidity, the
interactionbetweentheLCR and theprovisionofcentral bank facilitiesis
criticallyimportant.
TheCommitteewill thereforecontinuetoworkonthisissueoverthenext
year.
GHOS members endorsedtwoother areasof further analysis.
First, theCommitteewill continuetodevelop disclosurerequirementsfor
bank liquidityand funding profiles.
Second, the Committeewill continueto exploretheuse of market-based
indicatorsofliquiditytosupplement theexistingmeasuresbasedonasset
classesand credit ratings.

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TheGHOSdiscussedandendorsedtheBaselCommittee'smedium-term
workagenda.
Followingthesuccessful agreement of the LCR, the Committeewill now
pressahead withthereview of the Net StableFunding Ratio.
Thisisacrucialcomponent in thenewframework,extendingthescopeof
international agreement to the structureof banks' debt liabilities.
This will be a priority for the Basel Committee over thenext twoyears.
Over thenext few years, the Basel Committeewill also:
1.Completethe overhaul of the policy framework currentlyunder way
2.Continueto strengthen thepeer review programme establishedin 2012
tomonitor theimplementationof reformsin individual jurisdictions
3.Monitor the impact of, and industry responseto, recent and proposed
regulatoryreforms.
During 2012the Committeehasbeen examining thecomparabilityof
model-basedinternal risk weightingsand consideringthe appropriate
balancebetweenthesimplicity, comparability and risk sensitivityof the
regulatoryframework.
TheGHOSencouraged continuation of thisworkin 2013asa matter of
priority.
Furthermore,theGHOSsupportedtheCommittee'sintentiontopromote
effectivemacro- and microprudential supervision.
TheGHOSalsoendorseda new Charter for the Basel Committee.

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Thenew Charter setsout the Committee's objectivesand keyoperating
modalities,andisdesignedtoimproveunderstandingof theCommittee's
activitiesand decision-makingprocesses.
Finally, theGHOSreiteratedtheimportanceof full, timelyandconsistent
implementationof Basel III standards.
Mervyn King, Chairman of the GHOS and Governor of the Bank of
England, said,
"TheLiquidityCoverageRatio is a keycomponent of the BaselIII
framework.
Theagreement reachedtoday is a very significant achievement.
For thefirst timein regulatoryhistory, wehave a truly global minimum
standard for bank liquidity.
Importantly, introducinga phased timetablefor the introduction of the
LCR, and reaffirming that a bank's stock of liquid assetsareusablein
timesof stress, will ensure that thenew liquiditystandard will in noway
hinder the abilityof theglobal banking system tofinancea recovery."
Stefan Ingves,Chairman of the BaselCommitteeand Governor of the
SverigesRiksbank, noted:
"TheamendmentstotheLCR are designedtoensure that it providesa
soundminimum standard for bank liquidity- a standard that reflects
actual experienceduring timesof stress.
Thecompletion of this work will allowtheBasel Committeeto turn its
attention to refiningthe other component of thenew global liquidity
standards,the Net StableFunding Ratio, whichremainssubject toan
observation period ahead of its implementation in 2018."

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Annex 1
Summary description of the LCR
Topromoteshort-term resilienceof a bank‘sliquidityrisk profile, the
Basel Committeedeveloped the LiquidityCoverage Ratio(LCR).
This standard aimstoensure that a bank hasan adequate stock of
unencumberedhigh qualityliquid assets(HQLA) whichconsistsof cash
or assetsthat canbeconverted intocashat littleor nolossof value in
private marketstomeet itsliquidityneedsfor a 30calendar day liquidity
stressscenario.
TheLCR hastwocomponents:
(a)Thevalue of thestock of HQLA
(b)Total net cashoutflows
and isexpressed as:
High Quality Liquid Assets
Thenumerator of theLCR is the stock of HQLA.
Under thestandard, banksmust hold a stock of unencumberedHQLAto
cover thetotal net cashoutflowsover a 30-dayperiod under theprescribed
stressscenario.

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In order toqualify asHQLA, assetsshould be liquid in marketsduring a
timeof stressand, in most cases, be eligiblefor usein central bank
operations.
Certaintypes of assetswithin HQLA aresubject toa range of haircuts.
HQLA are comprised of Level 1and Level 2 assets.
Level 1assetsgenerallyincludecash, central bank reserves, and certain
marketablesecuritiesbacked by sovereignsandcentral banks, among
others.
Theseassetsare typically of the highestqualityand the most liquid, and
thereis nolimit on the extent towhicha bank canhold theseassetsto
meet the LCR.
Level 2 assetsare comprised of Level 2Aand Level 2B assetsand include
certainmarketablegovernment securitiesaswellascorporatedebt
securities,residential mortgage backed securitiesand equitiesthat meet
certainconditions.
Level 2 assets(comprisingLevel 2Aand Level 2B assets) are typically of
slightlylesser qualityand may not in aggregate account for more than
40% of a bank‘sstock of HQLA.
Level 2Bassetsmaynot account for morethan15%of abank‘stotal stock
of HQLA.
Total net cash outflows
Thedenominator of the LCR is thetotal net cash outflows.
It is defined astotal expectedcash outflows, minustotal expected cash
inflows, in the specified stressscenario for the subsequent 30calendar
days.

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Total expectedcash outflowsare calculatedby multiplying the
outstandingbalancesof variouscategoriesor types of liabilitiesand
off-balancesheet commitmentsbytheratesat whichtheyareexpectedto
run off or bedrawndown.
Totalexpectedcashinflowsarecalculatedbymultiplyingtheoutstanding
balancesof variouscategoriesof contractual receivablesbythe ratesat
whichtheyare expected to flow in.
Total cashinflowsare subject toan aggregate cap of 75% of total
expectedcash outflows, therebyensuringa minimum level of HQLA
holdingsat all times.
Liquidity Coverage Ratio
Thestandardrequiresthat, absent asituationoffinancialstress, thevalue
of the ratio beno lowerthan 100% (ie thestockof HQLA should at least
equal total net cashoutflows).
Banks are expectedtomeet thisrequirement continuouslyand hold a
stockof unencumberedHQLAasadefenceagainst thepotential onset of
liquiditystress.
During a period of financial stress, however,banksmay usetheir stock of
HQLA, therebyfallingbelow 100%.
Important - The 100% threshold isthe minimum requirement absent a
period of financial stress, and after thephase-in arrangementsare
complete.
Referencesto 100% may be adjustedfor anyphase-inarrangementsin
forceat a particular time.
Annex 2
Complete set of agreedchangesto the LiquidityCoverageRatio

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HIGH QUALITY LIQUID ASSETS(HQLA)
Expand thedefinition of HQLA subject toahigherhaircut and limit
-Corporatedebt securitiesratedA+ to BBB– witha 50% haircut
- Certainunencumberedequitiessubject to a 50% haircut
-Certainresidentialmortgage-backedsecuritiesratedAAorhigherwitha
25%haircut
Aggregate of additional assets,afterhaircuts,subject toa 15% limit of the
HQLA
Ratingrequirement onqualifyingLevel 2assets
- Use of localrating scalesand inclusion of qualifying commercial paper
Usabilityof theliquiditypool
-Incorporatelanguagerelatedtotheexpectationthat bankswill usetheir
pool of HQLA during periodsof stress
Operational requirements
- Refineand clarifythe operational requirementsfor HQLA
Operation of thecap onLevel 2HQLA
- Revise and improve theoperation of thecap
Alternative liquidasset (ALA) framework
-Develop the alternativetreatmentsand includea fourth option for
sharia-compliant banks

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Central bank reserves
-Clarifylanguageto confirm that supervisorshavenational discretion to
includeor excluderequired central bank reserves(aswell asovernight
and certain term deposits)asHQLA asthey consider appropriate
INFLOWSAND OUTFLOWS
Insureddeposits
- Reduceoutflow on certain fullyinsuredretail depositsfrom 5% to3%
- Reduceoutflow on fullyinsurednon-operationaldepositsfrom
non-financial corporates,sovereigns,central banksand publicsector
entities(PSEs) from 40% to20%
Non-financial corporate deposits
- Reducethe outflow ratefor ―non-operational‖ depositsprovidedby
non-financialcorporates,sovereigns,centralbanksandPSEsfrom75%to
40%
Committed liquidityfacilitiestonon-financial corporates
-Clarifythedefinitionof liquidityfacilitiesandreducethedrawdownrate
on theunused portion of committed liquidityfacilitiesto non-financial
corporates,sovereigns, central banks and PSEs from 100% to30%
Committed but unfunded inter-financial liquidityand credit facilities
-Distinguishbetweeninterbank and inter-financial credit and liquidity
facilitiesand reducethe outflow rateon the former from 100% to40%
Derivatives

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-Additional derivatives risks included in the LCR with a 100% outflow
(relates to collateral substitution, and excess collateral that the bank is
contractuallyobligatedto return/ provideif required by a counterparty)
-Introducea standardisedapproachfor liquidityrisk related to market
valuechangesin derivativespositions
-Assume net outflowof 0% for derivatives(and commitments) that are
contractuallysecured/ collateralisedbyHQLA
Tradefinance
-Includeguidancetoindicatethat a lowoutflowrate(0–5%) is expected
toapply
Equivalenceof central bank operations
-Reducethe outflow rateon maturing secured funding transactionswith
central banksfrom 25% to0%
Client servicing brokerage
-Clarifythetreatment of activitiesrelated to client servicing brokerage
(whichgenerallylead to an increasein net outflows)
OTHER
Rulestext clarifications
-Clearerguidanceon theusabilityof HQLA, and the appropriate
supervisoryresponse, hasbeen developed to ensure that thestock of
liquidassetsis availableto be used whenneeded
-Anumber of clarificationstothe rulestext topromote consistent
application and reducearbitrageopportunities (egoperational deposits

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from wholesaleclients,derivativescash flows, open maturityloans).Also
incorporation of previouslyagreed FAQ
Internationallyagreed phase-in of theLCR
- Theminimum LCR in2015wouldbe60%andincreaseby10percentage
pointsper year toreach 100% in 2019

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Commissioner MichelBarnier
The impact of the latest Basel
Committee liquidity developmentsfor
Capital Requirements (CRD 4) in the
EU
Inthelight of theGroup of Governorsand Headsof Supervisionmeeting
and the Basel Committeeon Banking Supervision pressreleasedated 6
January 2013.
"I welcome theunanimousagreement reachedby the Basel Committee
on therevised liquiditycoverageratio and the gradual approach for its
phasing-in by clearlydefineddates.
This is significant progresswhich addressesissuesalreadyraisedby the
European Commission.
We now need tomake full use of the observation period, and learnfrom
thereportsthat the European BankingAuthority will prepare on the
resultsof the observation period, beforeformallyimplementingin 2015
theliquiditycoverageratiounder EU law in linewiththe Basel
standards.
Thetreatment of liquidityisfundamental, both for the stabilityof banks
aswell asfor their rolein supportingwidereconomicrecovery.
I now call upon theParliament and the Council to successfullyconclude
theCRD 4 triloguenegotiationsin thecoming weeks."
Context
TheBasel Committeeon Banking Supervision(BCBS) hasagreeda
packageof LCR (liquiditycoverage ratio) revisionsunanimously aswell
asits2013work plan.
TheLCR revisionsincludean expansion of eligible assets,a lesssevere
calibration for certain cash flowsand a phasing-inarrangement from
January 2015to2019.

14
Thecurrent Commissionapproachtoliquidityin theCRD4
negotiations,namely first a reportingperiodfollowedby comprehensive
European BankingAuthority (EBA) Reportsand subsequentlya
delegatedact bythe Commission todefinethe detailed ratioremains fully
valid.
Background information
TheCommission's approachtoliquidityin CRD 4still remainsvalid in
thelight of thelatestBasel Committeeapproval of the revisionof a
number of parametersand calibrationson liquidity(GHOSmeetingof 6
January).
In the Basel Committee, theEuropean Central Bank, theEuropean
Commissionandvariouscountriesincludingfrom theEU hadarguedfor
such a revision.
At the level of the Basel Committee, thefinal packageof LCR revisions
will now be subject toan observation period witha QuantitativeImpact
Study(QIS) that will take placein 2013together withsome other
important work that still needsto be completed in the comingyear.
TheEU needstotake full benefit of this observation period and learn
from it, asthis isthefirst time in historythat regulatorsare defining
globallyharmonized, quantitativeliquiditystandards.
TheEBA will make reportson the resultsof the observation period for
EU banksbeforetheend of 2013.
Basedon theevaluation of this work, the Commission will propose
definingthedetailedLCR through a delegatedact (i.e. legislation
adopted by the Commission providednoobjectionsare raised by theEP
andthe Council).
Nevertheless, important workstill remainsto be completed at the global
and European levels.
This includesthedetermination of alternative, market-basedindicators
for the definitionof High QualityLiquidAssets(HQLA); thetreatment
of Central Bank facilitieswhichcould impact upon thedefinition of
HQLA and related cash flows;and thetreatment of market valuation
changeson derivativecashflows.

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In this light, thebestcoursecontinuestobe rapid adoption of theCRD 4
packagewhile leavingthe necessaryflexibility toimplement the final
detailed LCR standard through a delegatedact, takinginto accountthe
on-goingworkby Basel and the comprehensiveEBAreports.
Subjecttothis approach, thetextson thetablenow of theEuropean
Parliament and Council should be adoptedshortly, hopefullyin the
comingweeks.

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Basel III: The Liquidity
Coverage Ratio and liquidity risk
monitoring tools, January 2013
Introduction
1.This document presentsone of theBasel
Committee‘skey reformsto develop a more
resilient banking sector: theLiquidity
Coverage Ratio(LCR).
Theobjectiveof theLCR is topromote the
short-term resilienceof the liquidityrisk
profile of banks.
It doesthis by ensuringthat bankshavean adequatestock of
unencumberedhigh-qualityliquid assets(HQLA) that can be converted
easilyandimmediatelyin privatemarketsintocashtomeet theirliquidity
needsfor a 30calendar day liquiditystressscenario.
TheLCR will improve thebankingsector‘sabilitytoabsorb shocks
arisingfrom financial and economicstress, whateverthe source, thus
reducingthe riskof spillover from thefinancial sector tothereal
economy.
This document setsout the LCR standard and timelinesfor its
implementation.
2.During the early―liquidityphase‖ of the financial crisisthat began in
2007,many banks– despiteadequatecapital levels– still experienced
difficultiesbecausetheydid not manage their liquidityin a prudent
manner.
Thecrisisdrove home theimportanceof liquiditytotheproper
functioningof financial marketsand thebanking sector.

17
Prior tothe crisis, asset marketswerebuoyant and funding wasreadily
availableat low cost.
Therapid reversal in market conditionsillustratedhow quicklyliquidity
can evaporate,and that illiquiditycan last for anextendedperiodof time.
Thebankingsystem cameunder severestress,whichnecessitatedcentral
bank action tosupport both the functioningof money marketsand, in
some cases, individual institutions.
3.Thedifficultiesexperienced by some banksweredueto lapsesin basic
principlesof liquidityrisk management.
In response, asthe foundation of itsliquidityframework, the
Committeein 2008published Principlesfor Sound LiquidityRisk
Management and Supervision(―Sound Principles‖).
TheSound Principlesprovide detailed guidanceon the risk management
and supervisionof funding liquidityrisk and should help promote better
risk management in thiscritical area, but only if there is full
implementationby banksand supervisors.
As such, the Committeewill continuetomonitor theimplementationby
supervisorstoensurethat banks adheretothese fundamental principles.
4.Tocomplement these principles,theCommittee hasfurther
strengtheneditsliquidityframeworkbydevelopingtwominimum
standardsfor fundingliquidity.
Thesestandardshave been developed to achievetwoseparatebut
complementaryobjectives.
Thefirst objectiveistopromoteshort-term resilienceof abank‘sliquidity
risk profile by ensuringthat it hassufficient HQLA tosurvive a significant
stressscenario lastingfor one month.

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TheCommitteedeveloped the LCR toachievethisobjective.
Thesecond objectiveis to promoteresilienceover a longer time horizon
bycreating additional incentivesfor banks to fund their activitieswith
more stablesourcesof fundingon an ongoingbasis.
TheNet StableFundingRatio(NSFR), whichis not coveredby this
document, supplementstheLCR and hasa time horizon of one year.
It hasbeendevelopedtoprovideasustainablematuritystructureof assets
and liabilities.
5.Thesetwostandardsare comprised mainlyof specific parameters
whichare internationally―harmonised‖ with prescribed values.
Certainparameters,however, contain elementsof national discretionto
reflect jurisdiction-specificconditions.
In thesecases, theparametersshould be transparent and clearlyoutlined
in theregulationsof each jurisdiction toprovide clarityboth withinthe
jurisdictionand internationally.
6.It should be stressedthat the LCR standard establishesa minimum
level of liquidityfor internationallyactivebanks.
Banks are expectedtomeet thisstandard aswell asadhere totheSound
Principles.
Consistent withtheCommittee‘scapital adequacystandards, national
authoritiesmay require higher minimum levelsof liquidity.
In particular, supervisorsshould be mindful that theassumptionswithin
theLCR may not capture all market conditionsor all periodsof stress.

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Supervisors are therefore free to require additional levels of liquidity to be
held, if they deem the LCR does not adequately reflect the liquidity risks
that their banks face.
7.Giventhat the LCR is, on itsown, insufficient tomeasureall
dimensionsof a bank‘sliquidityprofile,the Committeehasalso
developed a set of monitoring toolstofurtherstrengthen and promote
global consistencyin liquidityrisksupervision.
ThesetoolsaresupplementarytotheLCR and are tobeused for ongoing
monitoring of the liquidityriskexposuresof banks, and in
communicatingthese exposuresamong home and host supervisors.
8.TheCommitteeisintroducingphase-in arrangementstoimplement
theLCR tohelp ensure that thebankingsectorcan meet thestandard
through reasonablemeasures,while still supporting lendingto the
economy.
9.TheCommitteeremains firmly of the view that the LCR is an essential
component of the set of reformsintroducedby BaselIII and, when
implemented, will help delivera more robust and resilient banking
system.
However,theCommitteehasalsobeenmindful of theimplicationsof the
standard for financial markets,credit extension and economic
growth, and of introducingthe LCR at a time of ongoing strainsin some
bankingsystems.
It hasthereforedecidedtoprovidefor a phased introductionof the
LCR, in amannersimilartothatoftheBaselIII capitaladequacy
requirements.
10.Specifically, the LCR will be introduced as planned on 1 January
2015, but the minimum requirement will be set at 60% and rise in equal
annual stepstoreach 100% on 1January 2019.
This graduated approach, coupled withthe revisionsmade to the2010

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publicationof the liquiditystandards, are designed to ensure that the
LCR can be introduced without material disruption tothe orderly
strengtheningof banking systemsor theongoing financingof economic
activity.
11.TheCommittee alsoreaffirmsitsview that, during periodsof stress,it
wouldbe entirelyappropriatefor bankstousetheir stock of
HQLA, therebyfallingbelow the minimum.
Supervisorswill subsequentlyassessthis situationand will give guidance
on usability accordingto circumstances.
Furthermore, individual countriesthat are receivingfinancial support for
macroeconomicand structural reform purposesmay choosea different
implementationschedulefor their national banking systems, consistent
with the designof their broader economicrestructuringprogramme.
12.TheCommitteeiscurrentlyreviewingtheNSFR, whichcontinuesto
besubject to an observation period and remainssubject toreview to
addressany unintendedconsequences.
It remainstheCommittee‘sintentionthat theNSFR, including any
revisions,will become a minimum standard by 1January 2018.
13.This document isorganisedasfollows:
- Part 1definesthe LCR for internationallyactivebanksand dealswith
applicationissues.
- Part 2 presentsa set of monitoring tools tobe used by banksand
supervisorsin their monitoring of liquidityrisks.

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Part 1:The Liquidity Coverage Ratio
14.TheCommitteehasdeveloped theLCR to promotetheshort-term
resilienceof the liquidityrisk profile of banksby ensuringthat theyhave
sufficient HQLA tosurvivea significant stressscenario lasting30
calendar days.
15.TheLCR should be a key component of the supervisoryapproach to
liquidityrisk, but must be supplemented by detailedsupervisory
assessmentsof other aspectsof the bank‘sliquidityrisk management
frameworkin linewiththeSound Principles,theuseof the monitoring
toolsincluded in Part 2, and, in due course,theNSFR.
In addition, supervisorsmay require an individual bank toadopt more
stringent standardsor parameterstoreflect itsliquidityrisk profile and
thesupervisor‘sassessment of its compliancewiththe Sound Principles.
I. Objective of the LCR and use of HQLA
16.This standard aimsto ensure that a bank hasan adequatestock of
unencumbered HQLA that consistsof cash or assetsthat can be
converted intocash at littleor no lossof value in privatemarkets,tomeet
itsliquidityneedsfor a 30 calendar day liquiditystressscenario.
At a minimum, the stock of unencumbered HQLAshould enablethe
bank tosurviveuntil Day 30 of thestressscenario, by whichtime it is
assumedthat appropriatecorrectiveactionscanbetakenbymanagement
and supervisors,or that thebank can beresolved in an orderlyway.
Furthermore,it givesthe central bank additional time totakeappropriate
measures,should theybe regarded asnecessary.
As noted in the Sound Principles,given the uncertain timingof outflows
and inflows, banksare alsoexpected to be awareof any potential
mismatcheswithinthe30-dayperiod and ensure that sufficient HQLA
are availabletomeet any cash flowgapsthroughout theperiod.

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17.TheLCR builds on traditional liquidity―coverageratio‖
methodologiesused internallyby banks toassessexposuretocontingent
liquidityevents.
Thetotal net cash outflowsfor thescenario are tobe calculatedfor 30
calendar daysintothe future.
Thestandardrequiresthat, absent asituationoffinancialstress, thevalue
of the ratio be nolowerthan 100% (ie thestockof HQLA should at least
equal total net cashoutflows) on an ongoingbasisbecause thestock of
unencumbered HQLA is intendedtoserve asa defenceagainstthe
potential onset of liquiditystress.
During a period of financial stress, however,banksmay usetheir stockof
HQLA, therebyfallingbelow 100%, asmaintainingtheLCR at 100%
under such circumstancescould produceunduenegative effectson the
bank and other market participants.
Supervisorswill subsequentlyassessthis situationand will adjust their
responseflexiblyaccordingtothe circumstances.
18.In particular, supervisory decisionsregarding a bank‘suse of its
HQLA should be guided by consideration of the core objective and
definitionof the LCR.
Supervisorsshould exercisejudgement in their assessment and account
not onlyfor prevailingmacrofinancial conditions,but alsoconsider
forward-lookingassessmentsofmacroeconomicandfinancial conditions.
In determiningaresponse,supervisorsshouldbeawarethatsomeactions
could be procyclical if applied in circumstancesof market-widestress.
Supervisorsshould seek to take these considerationsintoaccount on a
consistent basisacrossjurisdictions.

23
(a)Supervisorsshould assessconditionsat an earlystage, and take
actionsif deemednecessary, toaddresspotential liquidityrisk.
(b)Supervisorsshould allowfor differentiatedresponsestoa reported
LCR below 100%.
Any potential supervisory responseshould be proportionatewith the
drivers,magnitude, duration and frequencyof the reportedshortfall.
(c)Supervisorsshould assessa number of firm- and market-specific
factorsin determiningthe appropriate response aswell asother
considerationsrelated to both domesticand global frameworksand
conditions.
Potential considerationsinclude, but arenot limitedto:
(i)Thereason(s) that the LCR fell below 100%.
This includesuseof the stock of HQLA, an inabilityto roll over funding
or largeunexpecteddrawson contingent obligations.
In addition, thereasonsmay relate tooverall credit, fundingand market
conditions,includingliquidityin credit, asset and funding
markets,affectingindividual banksor all institutions,regardlessof their
owncondition;
(ii)Theextent towhich the reporteddeclinein the LCR isdueto a
firm-specific or market-wideshock;
(iii)Abank‘soverall health and riskprofile, includingactivities,positions
with respect to other supervisoryrequirements,internal risk
systems,controlsand other management processes, among others;
(iv)Themagnitude,duration and frequency of the reporteddeclineof
HQLA;

24
(v)The potential for contagion to the financial system and additional
restricted flow of credit or reduced market liquidity due to actions to
maintainan LCR of 100%;
(vi)Theavailabilityofothersourcesofcontingent fundingsuchascentral
bank funding, or other actionsby prudential authorities.
(d) Supervisorsshould have a range of toolsat their disposal toaddressa
reported LCR below 100%.
Banks may use their stock of HQLA in both idiosyncratic and systemic
stress events, although the supervisory response may differ between the
two.
(i)At a minimum, a bank shouldpresent an assessment of itsliquidity
position, includingthe factorsthat contributed to itsLCR fallingbelow
100%, themeasuresthat havebeenand will betaken andtheexpectations
on thepotential length of thesituation.
Enhanced reportingtosupervisorsshould be commensurate with the
duration of the shortfall.
(ii)If appropriate, supervisorscould alsorequire actionsbya bank to
reduceitsexposure toliquidityrisk, strengthen itsoverall liquidityrisk
management, or improve itscontingencyfundingplan.
(iii)However, in a situation of sufficientlysevere system-wide
stress,effectson the entire financial system should be considered.
Potential measurestorestoreliquiditylevelsshould be discussed, and
should be executed over a period of timeconsideredappropriate to
prevent additional stresson thebank and on thefinancial system asa
whole.
(e) Supervisors‘responsesshould be consistent withtheoverall approach
tothe prudential framework.

25
II. Definition of the LCR
19.The scenario for thisstandard entails a combined idiosyncratic and
market-wideshock that wouldresult in:
(a)Therun-off of a proportion of retail deposits;
(b) Apartial lossof unsecured wholesalefundingcapacity;
(c)Apartial lossof secured, short-term financingwithcertain collateral
and counterparties;
(d)Additional contractual outflowsthat wouldarisefrom a downgradein
thebank‘spubliccredit ratingby up toand includingthree
notches,includingcollateral posting requirements;
(e)Increasesin market volatilitiesthat impact thequalityof collateral or
potential future exposureof derivativepositionsand thusrequire larger
collateralhaircutsor additional collateral, or lead toother liquidityneeds;
(f)Unscheduleddrawson committed but unused credit and liquidity
facilitiesthat thebank hasprovidedtoitsclients;and
(g)Thepotential needfor thebank tobuy back debt or honour
non-contractual obligationsin theinterestof mitigatingreputational risk.
20.In summary, thestressscenario specified incorporatesmany of the
shocksexperiencedduring the crisis that startedin 2007 intoone
significant stressscenario for whicha bank wouldneed sufficient
liquidityon hand tosurvive for up to30calendar days.
21.This stresstest should be viewedasa minimum supervisory
requirement for banks.

26
Banks are expected to conduct their own stressteststo assess the level of
liquidity they should hold beyond this minimum, and construct their own
scenariosthat couldcausedifficultiesfortheir specificbusinessactivities.
Such internal stresstestsshould incorporate longer time horizonsthan
theonemandatedby thisstandard.
Banks are expectedtoshare the resultsof these additional stresstests
with supervisors.
22. The LCR hastwocomponents:
(a)Valueof thestock of HQLA in stressedconditions;and
(b)Total net cashoutflows, calculatedaccording to thescenario
parametersoutlined below.
A. Stock of HQLA
23. The numerator of the LCR isthe ―stock of HQLA‖.
Under thestandard, banksmust hold a stockof unencumberedHQLAto
cover thetotal net cashoutflows(asdefinedbelow) over a 30-dayperiod
under theprescribed stressscenario.
In order toqualify as―HQLA‖, assetsshould be liquidin marketsduring
a time of stressand, ideally, becentral bank eligible.

27
Thefollowingsetsout the characteristicsthat such assetsshould
generallypossessand theoperational requirementsthat theyshould
satisfy.
1. Characteristics of HQLA
24.Assetsare consideredtobe HQLA if theycan be easilyand
immediatelyconverted intocashat littleor no lossof value.
Theliquidityof an asset dependson theunderlying stressscenario, the
volume to be monetisedand the timeframe considered.
Nevertheless, there are certainassetsthat are more likelytogenerate
fundswithout incurringlargediscountsin sale or repurchaseagreement
(repo) marketsdue tofire-saleseven in timesof stress.
This section outlinesthe factorsthat influencewhether or not the market
for an asset can be relied upon to raiseliquiditywhen consideredin the
context of possiblestresses.
Thesefactorsshould assist supervisorsin determiningwhich
assets,despitemeeting thecriteria from paragraphs49to 54, are not
sufficientlyliquid in private marketstobe included in thestock of
HQLA.
(i) Fundamental characteristics
- Low risk: assetsthat arelessrisky tend tohave higher liquidity.
High credit standing of the issuer and a lowdegreeof subordination
increasean asset‘sliquidity.
Low duration, low legal risk, lowinflationrisk and denomination in a
convertiblecurrencywithlow foreign exchangerisk all enhancean
asset‘sliquidity.

28
- Easeandcertaintyofvaluation:anasset‘sliquidityincreasesif market
participantsare more likely to agree on itsvaluation.
Assetswithmore standardised, homogenousand simplestructures
tend to bemore fungible,promotingliquidity.
Thepricingformula of a high-qualityliquid asset must be easyto
calculate and not depend on strong assumptions.
Theinputsintothepricing formula must alsobe publicly available.
In practice, thisshould rule out the inclusion of most structured or
exotic products.
- Low correlationwithrisky assets:the stock of HQLA should not be
subjecttowrong-way(highly correlated) risk.
For example, assetsissuedby financial institutionsare more likely to
beilliquid in timesof liquiditystressin thebanking sector.
- Listed on a developed and recognised exchange: beinglisted
increasesan asset‘stransparency.
(ii) Market-related characteristics
- Active and sizablemarket: the asset should have active outright sale
or repo marketsat all times.
This meansthat:
- There should be historical evidenceof market breadth and market
depth.
This could be demonstrated by low bid-askspreads,high trading
volumes,and a largeand diversenumber of market participants.

29
Diversityof market participantsreducesmarket concentration and
increasesthereliabilityof the liquidityin themarket.
- There should be robust market infrastructure in place.
- Thepresenceof multiplecommitted market makers increases
liquidityasquoteswill most likely beavailable for buying or selling
HQLA.
- Low volatility:Assetswhosepricesremain relativelystableand are
lessprone tosharp price declinesover time will have a lower
probabilityof triggeringforcedsalestomeet liquidityrequirements.
Volatilityof traded prices and spreadsare simpleproxymeasuresof
market volatility.
There should be historicalevidenceof relativestabilityof market
terms(eg pricesand haircuts)and volumesduring stressedperiods.
- Flight to quality: historically, themarket hasshown tendenciesto
move intothese typesof assetsin a systemic crisis.
Thecorrelationbetweenproxiesof market liquidityand banking
system stressis onesimplemeasure that could be used.
25.As outlinedby thesecharacteristics, the test of whetherliquid assets
are of ―high quality‖ is that, by wayof saleor repo, their liquidity-
generatingcapacityis assumedto remain intact even in periodsof severe
idiosyncraticand market stress.
Lower qualityassetstypically fail tomeet that test.
An attempt by a bank toraise liquidityfrom lowerqualityassetsunder
conditionsof severe market stresswouldentail acceptanceof a large
fire-salediscount or haircut tocompensatefor high market risk.

30
That may not only erode themarket‘sconfidencein thebank, but would
alsogeneratemark-to-market lossesfor banksholding similar
instrumentsand add to the pressure on their liquidityposition, thus
encouragingfurther firesalesand declinesin pricesand market liquidity.
In thesecircumstances,privatemarket liquidityfor such instrumentsis
likely todisappearquickly.
26.HQLA (except Level 2B assetsasdefined below) should ideallybe
eligibleat central banks for intradayliquidityneedsand overnight
liquidityfacilities.
In the past, central bankshaveprovideda further backstop tothesupply
of banking system liquidityunder conditionsof severestress.
Central bank eligibilityshould thusprovide additional confidencethat
banksare holding assetsthat could be usedin eventsof severe stress
without damagingthe broader financial system.
That in turn wouldraise confidencein the safetyand soundnessof
liquidityrisk management in the bankingsystem.
27.It should be noted however, that central bank eligibility doesnot by
itselfconstitutethebasisfor the categorisationof an asset asHQLA.
2. Operational requirements
28.All assetsin thestock of HQLAare subject to the following
operational requirements.
Thepurposeof theoperational requirementsisto recognisethat not all
assetsoutlinedin paragraphs49-54that meet the asset class,
risk-weightingandcredit-ratingcriteriashouldbeeligibleforthestockas
thereare other operational restrictionson the availability of HQLA that
can prevent timelymonetisationduring a stressperiod.

31
29.Theseoperational requirementsare designed to ensure that thestock
of HQLA is managed in such a waythat the bank can, and isable to
demonstratethat it can, immediatelyusethestock of assetsasasourceof
contingent fundsthat is availablefor thebank toconvert intocash
through outright saleor repo, to fill fundinggapsbetweencashinflows
and outflowsat anytime during the30-daystressperiod, withno
restriction on the use of theliquiditygenerated.
30.Abank shouldperiodicallymonetisearepresentativeproportionofthe
assetsin thestock throughrepoor outright sale, in order totest itsaccess
tothe market, theeffectivenessof itsprocessesfor monetisation, the
availability of the assets,and tominimisetheriskof negativesignalling
during a period of actual stress.
31.All assetsin the stock should be unencumbered.
―Unencumbered‖ meansfree of legal, regulatory, contractual or other
restrictionson the ability of the bank toliquidate,sell, transfer, or assign
theasset.
An asset in thestock should not be pledged(either explicitlyor
implicitly) tosecure, collateraliseor credit-enhanceanytransaction, nor
bedesignatedtocover operational costs(such asrentsand salaries).
Assetsreceivedin reverserepoand securitiesfinancingtransactionsthat
are held at the bank, have not been rehypothecated, and are legallyand
contractuallyavailablefor the bank'suse can be consideredaspart of the
stockof HQLA.
In addition, assetswhichqualify for the stock of HQLAthat have been
pre-positionedor deposited with, or pledgedto, the central bank or a
public sector entity(PSE) but have not been used to generateliquidity
may be includedin thestock.
32.Abank should excludefrom thestock thoseassetsthat, although
meetingthedefinitionof ―unencumbered‖ specified in paragraph 31, the

32
bank wouldnot have theoperational capability tomonetise tomeet
outflowsduring thestressperiod.
Operational capabilitytomonetiseassetsrequireshavingprocedures and
appropriatesystemsin place, includingproviding the function identified
in paragraph 33 withaccesstoall necessary information to execute
monetisationof anyasset at any time.
Monetisationof theasset must be executable,from an operational
perspective, in the standard settlement period for the asset classin the
relevant jurisdiction.
33.Thestock should be under the control of the function charged with
managingthe liquidityof thebank (eg the treasurer), meaning the
functionhasthe continuousauthority, and legal and operational
capability, tomonetiseanyasset in the stock.
Controlmustbeevidencedeitherbymaintainingassetsin aseparatepool
managed by the function withthe soleintent for useasa source of
contingent funds,orbydemonstratingthat thefunctioncan monetisethe
asset at any point in the 30-daystressperiod and that theproceedsof
doing soare availableto thefunction throughout the 30-daystressperiod
without directlyconflictingwitha statedbusinessor risk management
strategy.
For example, an asset should not be included in the stock if the saleof
that asset, without replacement throughout the30-dayperiod, would
remove a hedge that wouldcreatean open risk position in excessof
internallimits.
34.Abank is permittedtohedgethemarket risk associatedwith
ownership of the stock of HQLA and still includethe assetsin the stock.
If it choosestohedgethemarket risk, the bank should take intoaccount
(in the market valueapplied toeach asset) thecash outflow that would

33
ariseif the hedgeweretobe closed out early (in theevent of theasset
beingsold).
35.In accordance with Principle 9 of the Sound Principlesa bank ―should
monitor the legal entity and physical location where collateral is held and
how it may bemobilised in a timely manner‖.
Specifically, it should have a policy in placethat identifieslegal
entities, geographicallocations,currenciesand specificcustodial or
bank accountswhereHQLA are held.
In addition, thebank should determinewhetheranysuch assetsshould
beexcluded for operational reasonsand therefore, havethe ability to
determinethecompositionof itsstock on a daily basis.
36.As noted in paragraphs171and 172, qualifying HQLAthat are held to
meet statutoryliquidityrequirementsat the legal entityor sub -
consolidatedlevel (whereapplicable) mayonlybeincludedinthestock at
theconsolidatedlevel tothe extent that therelated risks(asmeasured by
thelegal entity‘s or sub-consolidated group‘snet cash outflowsin the
LCR) are alsoreflectedin the consolidated LCR.
Any surplusof HQLAheld at thelegal entitycan onlybe included in the
consolidatedstock if thoseassetswouldalsobe freelyavailableto the
consolidated(parent) entityin timesof stress.
37.In assessingwhetherassetsare freely transferablefor regulatory
purposes,banksshouldbeawarethat assetsmaynot befreelyavailableto
theconsolidatedentitydueto regulatory, legal, tax, accountingor other
impediments.
Assetsheld in legal entitieswithout market accessshould onlybe
includedto the extent that theycan be freelytransferredtoother entities
that could monetise theassets.

34
38.In certain jurisdictions,large, deep and activerepomarketsdo not
existfor eligibleasset classes,and thereforesuch assetsare likelyto be
monetised through outright sale.
In thesecircumstances, a bank should exclude from thestock of HQLA
thoseassetswherethere areimpedimentsto sale,such aslarge fire-sale
discountswhichwouldcauseit to breach minimum solvency
equirements,or requirementstohold suchassets, including, but not
limitedto, statutoryminimum inventoryrequirementsfor market
making.
39.Banksshouldnot includein thestockofHQLA anyassets,orliquidity
generatedfrom assets,theyhavereceivedunder right of
rehypothecation, if thebeneficial ownerhasthe contractual right to
withdraw thoseassetsduring the 30-daystressperiod.
40.Assetsreceived ascollateral for derivativestransactionsthat are not
segregated and arelegallyable to be rehypothecated may be included in
thestock ofHQLAprovided that thebank recordsanappropriateoutflow
for the associatedrisksasset out in paragraph 116.
41.Asstatedin Principle8of theSound Principles,abank shouldactively
manageitsintradayliquiditypositionsand risksto meet payment and
settlement obligationson a timelybasisunder both normal and stressed
conditionsandthuscontributetothesmoothfunctioningof payment and
settlement systems.
Banks and regulatorsshould be awarethat theLCR stressscenario does
not cover expected or unexpectedintradayliquidityneeds.
42.While theLCR isexpectedtobemet andreportedinasingle
currency, banksare expected tobe abletomeet their liquidityneedsin
eachcurrencyand maintain HQLAconsistent withthe distributionof
their liquidityneedsbycurrency.

35
Thebank should be abletousethestock to generateliquidityin the
currencyand jurisdictionin whichthenet cash outflowsarise.
Assuch, theLCR bycurrencyisexpectedtobemonitoredandreportedto
allowthebank and itssupervisor totrack anypotential currency
mismatchissuesthat could arise, asoutlinedin Part 2.
In managingforeign exchangeliquidityrisk, the bank should take
intoaccount therisk that its abilityto swapcurrencies and accessthe
relevant foreign exchangemarketsmay eroderapidlyunder stressed
conditions.
It should be awarethat sudden, adverseexchangerate movementscould
sharplywidenexistingmismatchedpositionsand alter theeffectiveness
of anyforeign exchangehedgesin place.
43. In order tomitigate cliff effectsthat could arise, if an eligibleliquid
asset became ineligible(egduetoratingdowngrade),abank ispermitted
tokeep such assetsin its stock of liquid assetsfor an additional 30
calendar days.
Thiswouldallowthebank additionaltimetoadjust itsstock asneededor
replace theasset.
3. Diversification of the stock of HQLA
44.Thestock of HQLA should bewelldiversifiedwithin theasset classes
themselves(except for sovereign debt of thebank‘shome jurisdictionor
from thejurisdictionin whichthe bank operates;central bank reserves;
central bank debt securities;and cash).
Although some asset classes are more likely to remain liquid irrespective
of circumstances, ex-ante it is not possible to know with certainty which
specific assetswithineach asset classmight be subjecttoshocksex-post.
Banks should thereforehave policiesand limitsin place in order to

36
avoid concentrationwith respect to asset types, issueand issuer
types, and currency (consistent withthedistributionof net cash
outflowsbycurrency) withinasset classes.
4. Definition of HQLA
45.Thestock of HQLA should comprise assetswiththecharacteristics
outlined in paragraphs24-27.
This section describesthe type of assetsthat meet thesecharacteristics
and can thereforebe included in the stock.
46.There aretwocategories of assetsthat can be included in thestock.
Assetstobe included in each categoryare thosethat the bank is holding
on thefirst dayof thestressperiod, irrespectiveof their residual maturity.
―Level 1‖assetscan be included without limit, while ―Level 2‖ assetscan
onlycompriseup to 40% of thestock.
47.Supervisorsmay alsochoosetoincludewithin Level 2 anadditional
classof assets(Level 2B assets- see paragraph 53below).
If included, theseassetsshould compriseno more than 15% of the total
stockof HQLA.
Theymust alsobe included withintheoverall 40% cap on Level 2 assets.
48.The40% cap onLevel 2 assetsand the15% cap on Level 2B assets
should be determined after theapplication of required haircuts, and after
takingintoaccount theunwindof short-term securitiesfinancing
transactionsand collateralswaptransactionsmaturingwithin30calendar
days that involve theexchangeof HQLA.
In this context, short term transactionsare transactionswitha maturity
date up toand including30 calendar days.

37
Thedetails of the calculationmethodology areprovided inAnnex 1.
(i) Level 1assets
49.Level 1assetscan comprisean unlimitedshareof thepool and are not
subjecttoa haircut under theLCR.
However,national supervisorsmay wishto require haircutsfor Level 1
securitiesbased on, amongother things,their duration, credit and
liquidityrisk, and typical repohaircuts.
50. Level 1assetsare limitedto:
(a)Coinsand banknotes;
(b)Central bank reserves(includingrequired reserves), to theextent that
thecentral bank policiesallowthem tobe drawndown in timesof stress;
(c)Marketablesecuritiesrepresenting claimson or guaranteed by
sovereigns, central banks, PSEs, theBank for International
Settlements,the International MonetaryFund, the European Central
Bank and European Community, or multilateral development banks, and
satisfyingall of thefollowingconditions:
- assigned a 0% risk-weight under theBasel II StandardisedApproach
for credit risk;
- tradedin large,deep andactiverepoorcashmarketscharacterisedby
a low level of concentration;
- havea proven record asa reliablesourceof liquidityin the markets
(repoor sale) even during stressedmarket conditions;and
- not an obligationof a financial institutionor any of itsaffiliated
entities.

38
(d)wherethe sovereign has a non-0% risk weight, sovereignor central
bank debt securitiesissuedin domestic currenciesby thesovereign or
central bank in thecountry in whichthe liquidityriskis being takenor in
thebank‘shome country; and
(e)wherethe sovereignhas a non-0% risk weight, domestic sovereignor
central bank debt securitiesissued in foreign currenciesare eligible up to
theamount of the bank‘sstressednet cashoutflowsin that specific
foreign currencystemmingfrom the bank‘soperationsin thejurisdiction
wherethebank‘sliquidityriskis being taken.
(ii) Level 2assets
51.Level 2 assets(comprisingLevel 2Aassetsand any Level 2B assets
permittedby the supervisor) can be includedin the stock of
HQLA, subject totherequirement that they comprise nomore than
40% of theoverall stock after haircutshavebeen applied.
52.A15%haircut isapplied tothe current market value of each Level 2A
asset held in thestock of HQLA.
Level 2Aassets are limited to the following:
(a)Marketablesecuritiesrepresenting claimson or guaranteed by
sovereigns, central banks, PSEs or multilateral development banksthat
satisfyall of the followingconditions:
- assigneda20% risk weight under theBaselII StandardisedApproach
for credit risk;
- tradedin large,deep andactiverepoor cashmarketscharacterisedby
(repoor sale) even during stressedmarket conditions(ie maximum

39
declineof pricenot exceeding10% or increasein haircut not
exceeding10percentagepointsover a 30-dayperiod duringa relevant
period of significant liquiditystress);and
- not an obligationof a financial institutionor any of itsaffiliated
entities.
(b)Corporate debt securities(includingcommercial paper) and covered
bondsthat satisfy all of thefollowingconditions:
- in thecaseof corporate debt securities:not issued by a financial
institution or any of itsaffiliatedentities;
- in thecaseof covered bonds:not issuedbythebank itself oranyof its
affiliatedentities;
- either
(i)havea long-term credit rating from a recognisedexternal credit
assessment institution(ECAI) of at least AA-21or in the absence of a
longterm rating, a short-term ratingequivalent in qualitytothe
long-term rating; or
(ii)donot have a credit assessment by a recognisedECAI but are
internallyrated ashavinga probabilityof default (PD) corresponding
toa credit ratingof at leastAA-;
a low level of concentration; and
- have a proven record as a reliable source of liquidity in the markets
(repo or sale) even during stressed market conditions: ie maximum
decline of price or increase in haircut over a 30-day period during a
relevant period of significant liquiditystressnot exceeding10%.

40
(iii) Level 2B assets
53.Certainadditional assets(Level 2B assets) may be includedin Level 2
at the discretion of national authorities.
In choosing to include these assets in Level 2 for the purpose of the
LCR, supervisors are expected to ensure that such assets fully comply
with thequalifying criteria.
Supervisorsare alsoexpectedtoensure that bankshave appropriate
systemsand measurestomonitor and control the potential risks (eg
credit and market risks)that bankscould be exposed toin holding these
assets.
54.Alargerhaircut isappliedtothecurrent market valueofeachLevel2B
asset held in thestock of HQLA.
Level 2B assetsare limitedtothe following:
(a)Residential mortgagebacked securities(RMBS) that satisfyall of the
followingconditionsmay be includedin Level 2B, subject to a 25%
haircut:
- not issued by, and the underlying assetshave not been originated by
thebank itself or any of its affiliatedentities;
- havea long-term credit rating from a recognised ECAI ofAA or
higher, or in the absenceof a longterm rating, a short-term rating
equivalent in qualityto the long-term rating;
(repoor sale) even during stressedmarket conditions,ie a maximum
declineofpricenot exceeding20%orincreaseinhaircut overa30-day

41
period not exceeding20percentagepointsduring a relevant period of
significant liquiditystress;
- theunderlying asset pool is restricted to residential mortgagesand
cannot contain structured products;
- theunderlying mortgagesare ―full recourse‘‘loans(ie in thecaseof
foreclosurethe mortgage ownerremainsliablefor anyshortfall in
salesproceedsfrom the property) and have a maximum loan-to-value
ratio (LTV) of 80% on average at issuance;and
- thesecuritisationsare subjectto―risk retention‖ regulationswhich
requireissuersto retain an interest in theassetstheysecuritise.
(b)Corporate debt securities (including commercial paper) that satisfy all
of the following conditionsmay be included in Level 2B, subject to a 50%
haircut:
- not issued by a financial institutionor any of its affiliatedentities;
- either
- (i) havealong-termcredit ratingfromarecognisedECAI betweenA+
and BBB- or in the absenceof a longterm rating, a short-term rating
equivalent in qualityto the long-term rating;or
- (ii) do not have a credit assessment by a recognised ECAI and are
internally rated as having a PD corresponding to a credit rating of
betweenA+ and BBB-;
declineofpricenot exceeding20% orincreaseinhaircut overa30-day

42
period not exceeding20percentagepointsduring a relevant period of
significant liquiditystress.
(c)Common equitysharesthat satisfy all of the followingconditionsmay
be included in Level 2B, subject to a 50% haircut:
- not issued by a financial institutionor any of its affiliatedentities;
- exchangetraded and centrallycleared;
- a constituent of the major stock index in thehome jurisdictionor
wherethe liquidityrisk is taken, asdecidedby the supervisor in the
jurisdictionwherethe index is located;
- denominatedin thedomesticcurrencyof a bank‘shome jurisdiction
or in thecurrencyof the jurisdictionwherea bank‘sliquidityrisk is
taken;
declineof sharepricenot exceeding40% or increasein haircut not
exceeding40percentagepointsover a30-dayperiodduring arelevant
period of significant liquidity.
(iv) Treatment for jurisdictions with insufficient HQLA
(a) Assessment of eligibility for alternative liquidity approaches
(ALA)
55. Some jurisdictionsmay have an insufficient supplyof Level 1assets(or
bothLevel 1andLevel 2assets)intheir domestic currencytomeet the
aggregate demand of bankswith significant exposures in this currency.

43
Toaddressthis situation, the Committeehasdeveloped alternative
treatmentsfor holdingsin the stock of HQLA, whichare expectedto
applytoa limitednumber of currenciesand jurisdictions.
Eligibilityfor suchalternativetreatment will bejudgedon thebasisof the
qualifying criteria set out in Annex 2 and will be determined through an
independent peer review processoverseen by the Committee.
The purpose of this processis to ensure that the alternative treatmentsare
onlyused when there is a true shortfall in HQLA in the domestic currency
relativetotheneedsin that currency.
56.Toqualify for thealternativetreatment, a jurisdiction should be able
todemonstrate that:
- thereis an insufficient supplyof HQLAin its domestic
currency, takingintoaccount all relevant factorsaffectingthe
supplyof, and demand for, such HQLA;
- theinsufficiencyis caused by long-term structural constraintsthat
cannot be resolved withinthe medium term;
- it hasthe capacity, through any mechanismor control in place, to
limit or mitigatetherisk that thealternativetreatment cannot workas
expected;and
- it is committed to observingthe obligationsrelatingto supervisory
monitoring, disclosure, and periodic self-assessment and
independent peer review of itseligibilityfor alternativetreatment.
All of the above criteria have to be met to qualify for the alternative
treatment.
57.Irrespectiveof whethera jurisdictionseekingALA treatment will
adopt thephase-in arrangement set out inparagraph 10for implementing

44
theLCR, the eligibilityfor that jurisdictionto adopt ALA treatment will
bebased on a fullyimplemented LCR standard (ie 100% requirement).
(b) Potential options for alternative treatment
58.Option 1– Contractual committed liquidityfacilitiesfrom therelevant
central bank, witha fee:
For currenciesthat donot have sufficient HQLA, asdetermined by
referenceto thequalifying principlesand criteria, Option 1wouldallow
banksto accesscontractual committed liquidityfacilitiesprovidedbythe
relevant central bank (ie relevant giventhecurrencyinquestion) for afee.
Thesefacilitiesshould not be confused withregular central bank
standingarrangements.
In particular, these facilities are contractual arrangements between the
central bank and the commercial bank with a maturity date which, at a
minimum, fallsoutsidethe 30-dayLCR window.
Further, thecontract must beirrevocableprior tomaturityand involveno
ex-post credit decisionby the central bank.
Such facilities areonlypermissibleif thereis alsoa feefor thefacility
whichis charged regardless of the amount, if any, drawn downagainst
that facilityand thefeeis set sothat banks whichclaim the facility lineto
meet the LCR, and bankswhichdo not, have similar financial incentives
to reducetheir exposure toliquidityrisk.
That is, the feeshould be set sothat thenet yield on the assetsusedto
secure the facilityshould not be higher thanthenet yield on a
representativeportfolio of Level 1and Level 2 assets,after adjustingfor
anymaterial differencesin credit risk.
Ajurisdictionseekingtoadopt Option1shouldjustify in theindependent
peer review that thefee is suitablyset in a manner asprescribedin this

45
paragraph.
59.Option 2 – Foreign currency HQLA tocover domestic currency
liquidityneeds:
For currenciesthat donot have sufficient HQLA, asdeterminedby
referenceto thequalifying principlesand criteria, Option 2wouldallow
supervisorstopermit banks that evidencea shortfall of HQLA in the
domesticcurrency(which wouldmatchthe currencyof the underlying
risks)toholdHQLA in acurrencythat doesnot matchthecurrencyofthe
associated liquidityrisk, provided that theresultingcurrency mismatch
positionsare justifiableand controlledwithin limitsagreedbytheir
supervisors.
Supervisorsshould restrict such positionswithinlevelsconsistent with
thebank‘sforeign exchangeriskmanagement capacityand needs, and
ensure that suchpositionsrelateto currenciesthat are freelyand reliably
convertible, are effectivelymanagedby the bank, and wouldnot pose
unduerisk to itsfinancial strength.
In managingthose positions,thebank should take intoaccount therisks
that itsabilitytoswapcurrencies,and itsaccessto therelevant foreign
exchangemarkets, may eroderapidlyunder stressedconditions.
It should alsotake intoaccount that sudden, adverse exchangerate
movementscould sharply widenexistingmismatchpositionsand alter
theeffectivenessof anyforeign exchangehedgesin place.
60.To account for foreign exchange risk associated with foreign currency
HQLA used to cover liquidity needsin the domestic currency, such liquid
assetsshould be subject to a minimum haircut of 8% for major currencies
that are activein global foreign exchangemarkets.
For other currencies, jurisdictionsshould increasethe haircut toan
appropriatelevel on thebasisof historical (monthly) exchangerate
volatilitiesbetweenthe currencypair over an extended period of time.

46
If the domesticcurrencyisformallypeggedtoanother currencyunder an
effectivemechanism, the haircut for thepegged currencycan be lowered
toa level that reflectsthe limitedexchangerate risk under thepeg
arrangement.
Toqualify for this treatment, the jurisdictionconcernedshould
demonstratein the independent peer review theeffectivenessof its
currencypeg mechanism and assessthe long-term prospect of keeping
thepeg.
61.HaircutsforforeigncurrencyHQLA usedunderOption2wouldapply
onlyto HQLA in excessof a threshold specifiedby supervisorswhichis
not greater than 25%.
This is toaccommodate a certain level of currencymismatchthat may
commonlyexist among banks in their ordinary courseof business.
62.Option3 –Additional useof Level 2assetswitha higher haircut:This
optionaddressescurrenciesforwhichthereareinsufficient Level 1
assets,asdetermined by referenceto thequalifying principlesand
criteria, but wherethere are sufficient Level 2Aassets.
In this case, supervisorsmay choosetoallowbanksthat evidencea
shortfall of HQLA in thedomesticcurrency(tomatch thecurrencyof the
liquidityrisk incurred) to hold additional Level 2Aassetsin the stock.
Theseadditional Level 2Aassetswouldbe subject to a minimum haircut
of 20%, ie 5% higher than the 15% haircut applicableto Level 2Aassets
that are includedin the 40% cap.
Thehigher haircut isused tocover anyadditional price and market
liquidityrisksarisingfrom increasedholdingsof Level 2Aassetsbeyond
the40% cap, and toprovide a disincentivefor banks touse this option
based on yield considerations.

47
Supervisorshave theobligationto conduct an analysisto assesswhether
theadditional haircut is sufficient for Level 2Aassetsin their markets,and
shouldincreasethehaircut if thisiswarrantedtoachievethepurposefor
whichit isintended.
Supervisorsshould explainand justify the outcomeof the analysis
(includingthe level of increasein the haircut, if applicable) during the
independent peerreview assessment process.Any Level 2Bassetsheldby
thebank wouldremain subject tothe cap of 15%, regardlessof the
amount of other Level 2 assetsheld.
(c) Maximum level of usage of options for alternative treatment
63. The usage of any of the above optionswould be constrained by a limit
specified by supervisors in jurisdictions whose currency is eligible for the
alternativetreatment.
Thelimit should beexpressed in termsof the maximum amount of
HQLA associated withtheuse of theoptions(whetherindividuallyor in
combination) that abank isallowedtoincludeinitsLCR, asapercentage
of the total amount of HQLA thebank isrequired tohold in the currency
concerned.
HQLA associated withtheoptionsrefer to:
(i)In thecaseof Option 1, the amount of committed liquidityfacilities
granted by therelevant central bank;
(ii)In thecaseofOption2, theamount offoreigncurrencyHQLA usedto
cover theshortfall of HQLA in the domestic currency; and
(iii)In thecaseof Option 3, theamount of Level 2 assetsheld (including
thosewithin the40% cap).
64. If, for example, the maximum level of usageof the optionsis set at
80%, it meansthat abank adopting theoptions, either individuallyor in

48
combination, wouldonlybe allowedtoincludeHQLA associatedwith the
options(afterapplying anyrelevant haircut) up to80% of therequired
amount of HQLA in therelevant currency.
Thus,at least 20%of theHQLArequirement will havetobemet byLevel
1assetsin the relevant currency.
Themaximum usageoftheoptionsisofcoursefurtherconstrainedbythe
bank‘sactual shortfall of HQLA in thecurrencyconcerned.
65. The appropriatenessof themaximum level of usageof the options
allowedby a supervisorwill be evaluatedin the independent peer review
process.
Thelevel set should be consistent withthe projected size of theHQLA
gapfaced by bankssubjecttothe LCR in the currencyconcerned, taking
intoaccount all relevant factorsthat may affect thesize of the gap over
time.
Thesupervisor should explain how thislevel is derived, and justifywhy
thisis supportedbythe insufficiencyof HQLA in the banking system.
Where a relatively high level of usage of the optionsisallowed by the
supervisor (eg over 80%), the suitability of this level will come under
closerscrutinyin theindependent peer review.
(d) Supervisory obligations and requirements
66. Ajurisdiction with insufficient HQLA must, among other things, fulfil
the following obligations (the detailed requirements are set out in Annex
2):
- Supervisorymonitoring: There should be a clearlydocumented
supervisoryframework for overseeingand controllingtheusageof the
optionsby itsbanks, and for monitoring their compliance withthe
relevant requirementsapplicableto their use of theoptions;

49
- Disclosureframework:Thejurisdictionshould discloseitsframework
for applying the optionstoitsbanks (whetheron itswebsiteor
through other means).
Thedisclosureshould enableother national supervisorsand
stakeholderstogaina sufficient understandingof itscompliancewith
thequalifying principlesand criteria and themanner in whichit
supervisestheuse of the optionsby itsbanks;
- Periodic self-assessment of eligibilityfor alternativetreatment: The
jurisdictionshould perform a self-assessment of itseligibilityfor
alternativetreatment every fiveyears after it has adopted the
options,and disclosethe resultstoother national supervisorsand
stakeholders.
67.Supervisorsin jurisdictionswith insufficient HQLA should devise
rules and requirementsgoverning theuse of theoptionsbytheir
banks, havingregard totheguiding principlesset out below.
- Principle1:Supervisorsshouldensurethat banks‘useoftheoptionsis
not simplyaneconomicchoicethat maximisestheprofitsof thebank
through theselection of alternativeHQLA basedprimarilyon yield
considerations.Theliquiditycharacteristics of an alternativeHQLA
portfolio must be considered to be moreimportant than itsnet yield.
- Principle2: Supervisorsshould ensure that theuseof the optionsis
constrained, bothforall bankswithexposuresin therelevant currency
and on a bank-by-bank basis.
- Principle3: Supervisorsshould ensure that bankshave, totheextent
practicable,taken reasonablestepsto use Level 1and Level 2assets
and reducetheir overall level of liquidityrisk to improve the
LCR, beforethealternativetreatment can be applied.

50
- Principle4: Supervisorsshould have a mechanism for restrainingthe
usageof the optionsto mitigate risksof non-performanceof the
alternativeHQLA.
(v) Treatment for Shari‘ah compliant banks
68. Shari‘ah compliant banksfacea religiousprohibition on holding
certaintypesof assets,such asinterest-bearingdebt securities.
Even in jurisdictionsthat have a sufficient supplyof HQLA, an
insurmountableimpediment tothe abilityof Shari‘ah compliant banksto
meet the LCR requirement may still exist.
In such cases, national supervisorsin jurisdictionsin whichShari‘ah
compliant banksoperate have the discretionto defineShari‘ahcompliant
financial products(such asSukuk) asalternativeHQLA applicableto
such banks only, subjecttosuch conditionsor haircutsthat the
supervisorsmay require.
It should be noted that the intention of this treatment isnot toallow
Shari‘ahcompliant bankstohold fewer HQLA.
Theminimum LCR standard, calculatedbased on alternativeHQLA
(post-haircut) recognised asHQLA for thesebanks, should not be lower
than the minimum LCR standard applicableto other banksin the
jurisdictionconcerned.
National supervisorsapplying suchtreatment for Shari‘ah compliant
banksshould comply withsupervisory monitoring and disclosure
obligationssimilar tothoseset out in paragraph 66above.

51
B. Total net cash outflows
69. The term total net cash outflows is defined as the total expected cash
outflowsminustotal expected cash inflowsin the specified stressscenario
for the subsequent 30 calendar days.
Total expectedcash outflowsare calculatedby multiplying the
outstandingbalancesof variouscategoriesor types of liabilitiesand
off-balancesheet commitmentsbytheratesat whichtheyareexpectedto
run off or bedrawndown.
Totalexpectedcashinflowsarecalculatedbymultiplyingtheoutstanding
balancesof variouscategoriesof contractual receivablesbythe ratesat
whichtheyare expected to flow in under the scenario up to an aggregate
cap of 75% of total expectedcashoutflows.
70.While most roll-off rates,draw-downratesand similar factorsare
harmonisedacrossjurisdictionsasoutlinedin thisstandard, a few
parametersaretobedeterminedbysupervisoryauthoritiesat thenational
level.
Where this is the case, theparametersshould be transparent and made
publicly available.
71.Annex 4providesa summary of the factorsthat are applied to each
category.
72.Banks will not bepermitted todouble count items,ie if an assetis
includedaspart of the―stock of HQLA‖ (ie the numerator), the
associated cashinflowscannot alsobe counted ascash inflows(ie part of
thedenominator).

52
Wherethereispotential that anitemcouldbecountedin multipleoutflow
categories,(egcommitted liquidityfacilitiesgranted tocover debt
maturing within the30calendar day period), a bank onlyhasto assume
up tothemaximum contractual outflow for that product.
1. Cash outflows
(i) Retail deposit run-off
73.Retail depositsaredefinedasdepositsplacedwithabank byanatural
person.
Depositsfrom legal entities,sole proprietorshipsor partnershipsare
captured in wholesaledeposit categories.
Retail depositssubject to the LCR includedemand deposits and term
deposits,unlessotherwiseexcludedunder the criteriaset out in
paragraphs82and 83.
74.Theseretail depositsare divided into―stable‖ and ―lessstable‖
portionsof fundsasdescribed below, withminimum run-off rateslisted
for each category.
The run-off rates for retail deposits are minimum floors, with higher
run-off rates established by individual jurisdictions as appropriate to
capture depositorbehaviour in a period of stressin each jurisdiction.
(a) Stable deposits (run-off rate = 3% and higher)
75. Stabledeposits, whichusuallyreceivea run-off factor of 5%, are the
amount of the depositsthat are fullyinsuredby an effectivedeposit
insurancescheme or by a public guaranteethat providesequivalent
protectionand where:

53
- thedepositorshave other establishedrelationshipswiththebank that
make deposit withdrawalhighly unlikely; or
- thedepositsare in transactional accounts(eg accountswheresalaries
are automaticallydeposited).
76. For the purposesof this standard, an―effectivedeposit insurance
scheme‖ refers toa scheme
(i) That guaranteesthat it hasthe ability tomake prompt payouts,
(ii) For whichthe coverageis clearlydefined and
(iii) Of whichpublic awarenessishigh.
Thedeposit insurer in an effectivedeposit insurancescheme has formal
legal powerstofulfil its mandate and is operationally
independent, transparent and accountable.
Ajurisdictionwith an explicit and legallybindingsovereigndeposit
guaranteethat effectively functionsasdeposit insurancecan be regarded
ashaving an effectivedeposit insurancescheme.
77.Thepresenceof deposit insurancealoneis not sufficient toconsider a
deposit ―stable‖.
78.Jurisdictionsmay choosetoapplya run-off rate of 3% tostabledeposits
in their jurisdiction, if theymeet theabovestabledeposit criteria and the
followingadditionalcriteria for deposit insuranceschemes:
- theinsuranceschemeis basedon a system of prefundingviathe
periodic collectionof levies on banks withinsured deposits;
- theschemehasadequatemeansof ensuring ready accessto
additional funding in the event of a largecall on itsreserves,eg an

54
explicit and legallybindingguaranteefrom thegovernment, or a
standingauthority toborrow from thegovernment
- accesstoinsured depositsisavailableto depositorsin a short period
of time once the deposit insurancescheme is triggered.
Jurisdictionsapplying the 3% run-off rate to stabledepositswithdeposit
insurancearrangementsthat meet the above criteria should be ableto
provideevidenceof run-off ratesfor stabledepositswithin thebanking
system below 3% during anyperiodsof stressexperienced that are
consistent withtheconditionswithintheLCR.
(b) Lessstable deposits (run-off rates = 10%and higher)
79.Supervisoryauthoritiesare expectedtodevelop additional bucketswith
higherrunoffratesasnecessarytoapplytobucketsofpotentiallyless
stableretail depositsin their jurisdictions, withaminimum run-offrate of
10%.
Thesejurisdiction-specificrun-off ratesshould be clearlyoutlinedand
publicly transparent.
Bucketsof lessstabledepositscould includedepositsthat are not fully
coveredby an effectivedeposit insurancescheme or sovereign deposit
guarantee, high-valuedeposits, depositsfrom sophisticatedor high net
worthindividuals,depositsthat can be withdrawnquickly(eg internet
deposits)and foreign currencydeposits,asdetermined by each
jurisdiction.
80.If a bank is not ableto readily identifywhichretail depositswould
qualify as―stable‖ according to theabove definition(eg thebank cannot
determinewhichdepositsare coveredbyan effectivedeposit insurance
schemeor a sovereign deposit guarantee), it should place thefull amount
in the ―lessstable‖ bucketsasestablished by itssupervisor.

55
81.Foreigncurrencyretaildepositsaredepositsdenominatedin anyother
currencythan the domestic currencyin a jurisdictionin whichthe bank
operates.
Supervisorswill determinethe run-off factor that banksin their
jurisdictionshould usefor foreign currency deposits.
Foreigncurrencydepositswill be consideredas―lessstable‖ if there isa
reason tobelieve that suchdepositsare more volatile than domestic
currencydeposits.
Factorsaffectingthevolatilityof foreign currencydepositsincludethe
type and sophisticationof the depositors, and thenature of such deposits
(egwhetherthedepositsare linked to businessneedsin thesame
currency, or whetherthedepositsareplaced in a search for yield).
82.Cash outflowsrelatedtoretail term depositswith a residual maturityor
withdrawal notice period of greater than 30days will be excluded from
total expectedcashoutflowsif the depositor hasno legal right to
withdraw deposits within the30-dayhorizon of theLCR, or if early
withdrawal resultsin a significant penaltythat ismateriallygreater than
thelossof interest.
83.If a bank allowsa depositor towithdraw such depositswithout
applying the correspondingpenalty, or despitea clausethat says the
depositorhasnolegal right to withdraw, the entire categoryof thesefunds
wouldthen have to be treated asdemand deposits(ie regardlessof the
remainingterm, the depositswouldbe subject tothedeposit run-off rates
asspecified in paragraphs74-81).
Supervisorsin eachjurisdictionmay chooseto outlineexceptional
circumstancesthat wouldqualify ashardship, under whichthe
exceptional term deposit could be withdrawnby thedepositor without
changingthe treatment of theentire pool of deposits.

56
Such reasonscould include, but arenot limitedto, supervisoryconcerns
that depositorswouldwithdrawtermdepositsinasimilar fashionasretail
demanddepositsduring eithernormal orstresstimes,concernthat banks
may repay such depositsearlyin stressed timesfor reputational
reasons,or thepresenceof unintendedincentiveson banksto impose
material penaltieson consumersif depositsare withdrawnearly.
In thesecasessupervisorswouldassessa higher run-off againstall or
someof such deposits.
(ii) Unsecured wholesalefunding run-off
85.For thepurposesof the LCR, "unsecured wholesalefunding‖ is
definedasthoseliabilitiesand general obligationsthat are raised from
non-natural persons(ie legal entities, includingsole proprietorshipsand
partnerships)and arenot collateralisedby legal rightsto specifically
designatedassetsownedby the borrowinginstitution in thecaseof
bankruptcy, insolvency, liquidationor resolution.
Obligationsrelated toderivativecontractsare explicitlyexcludedfrom
thisdefinition.
86.Thewholesalefunding includedin theLCR is definedasall funding
that is callablewithinthe LCR‘s horizon of 30days or that hasitsearliest
possiblecontractual maturitydate situated withinthis horizon (such as
maturing term depositsand unsecured debt securities)aswell asfunding
with an undeterminedmaturity.
This should includeall funding withoptionsthat areexercisableat the
investor‘sdiscretionwithinthe 30 calendar day horizon.
For fundingwithoptionsexercisableat thebank‘sdiscretion, supervisors
should takeintoaccount reputational factorsthat may limit a bank's
abilitynot to exercisetheoption.

57
In particular, wherethemarket expectscertain liabilitiestobe redeemed
beforetheir legal final maturitydate, banks and supervisorsshould
assume such behaviour for the purposeof the LCR and includethese
liabilitiesasoutflows.
87.Wholesalefunding that is callableby thefundsprovider subject toa
contractuallydefined and bindingnoticeperiod surpassingthe 30-day
horizon is not included.
88.For thepurposesof the LCR, unsecuredwholesalefundingis to be
categorisedasdetailedbelow,basedon theassumed sensitivityof the
fundsproviderstotherate offered and the credit qualityand solvencyof
theborrowingbank.
This is determined by the type of fundsprovidersand their level of
sophistication, aswell astheir operational relationshipswiththe bank.
Therun-off ratesfor thescenario are listedfor each category.
(a) Unsecured wholesalefunding provided by small business
customers: 5%, 10% and Higher
89.Unsecuredwholesalefunding provided by small businesscustomersis
treatedthesamewayasretail depositsforthepurposesofthis
standard,effectivelydistinguishingbetweena "stable" portion of funding
providedby small businesscustomersand different bucketsof lessstable
fundingdefinedby eachjurisdiction.
Thesame bucket definitionsand associated run-off factorsapply asfor
retail deposits.
90.Thiscategoryconsistsof depositsand other extensionsof fundsmade
bynonfinancial small businesscustomers.

58
―Smallbusinesscustomers‖are definedin linewiththe definitionof
loansextended to small businessesin paragraph 231of theBasel II
frameworkthat are managed asretail exposuresand are generally
consideredashavingsimilarliquidityrisk characteristicstoretail
accountsprovided the total aggregated funding raised from one
small businesscustomer is lessthan €1million (on a consolidated basis
whereapplicable).
91.Where a bank doesnot have anyexposure toa small businesscustomer
that wouldenableit tousethedefinitionunderparagraph231of the Basel
II Framework, the bank may includesuch a deposit in thiscategory
provided that the total aggregatefunding raisedfrom thecustomer is less
than €1million (on a consolidatedbasiswhereapplicable) and thedeposit
is managed asa retail deposit.
This meansthat thebank treatssuch depositsin itsinternal risk
management systemsconsistentlyover time and in the same manner as
other retail deposits, and that the deposits are not individuallymanaged
in a waycomparableto larger corporatedeposits.
92.Term depositsfrom small businesscustomersshould be treatedin
accordancewiththetreatment for term retail deposits asoutlined in
paragraph 82, 83, and 84.
(b) Operational deposits generated by clearing, custody and
cash management activities: 25%
93. Certain activitieslead to financial and non-financial customers
needingto place, or leave, depositswith a bank in order tofacilitate their
accessand ability tousepayment and settlement systemsand otherwise
make payments.
Thesefundsmay receivea 25% run-off factor onlyif thecustomer hasa
substantivedependencywiththe bank and thedeposit is required for
such activities.

59
Supervisoryapproval wouldhavetobe giventoensure that banks
utilisingthistreatment actuallyare conductingthese operational
activitiesat the level indicated.
Supervisorsmay choosenot to permit banks toutilise the operational
deposit runoff rates in caseswhere, for example, a significant portion of
operational depositsare provided by a small proportion of customers(ie
concentration risk).
94.Qualifying activities in this context refer toclearing, custodyor cash
management activitiesthat meet the followingcriteria:
- Thecustomer is reliant on the bank toperform theseservicesasan
independent third party intermediary in order tofulfil its normal
bankingactivitiesover the next 30 days.
For example,thisconditionwouldnot bemet if thebank isawarethat
the customer hasadequate back-up arrangements.
- Theseservicesmust beprovidedunderalegallybindingagreement to
institutional customers.
- Theterminationof suchagreementsshall besubject eithertoanotice
period of at least 30days or significant switchingcosts(suchasthose
relatedtotransaction, informationtechnology, earlytermination or
legalcosts)tobebornebythecustomer if theoperationaldepositsare
movedbefore30days.
94.Qualifyingoperationaldepositsgeneratedbysuchan activityareones
where:
- Thedepositsare by-productsof the underlying servicesprovidedby
thebanking organisation and not sought out in the wholesalemarket
in thesoleinterest of offeringinterest income.

60
- Thedepositsare held in specificallydesignated accountsand priced
without givingan economicincentivetothe customer (not limitedto
paying market interest rates) to leaveanyexcessfundson these
accounts.
In the casethat interest ratesin a jurisdictionare closetozero, it
wouldbe expectedthat such accountsare noninterest bearing.
Banks should be particularlyawarethat during prolongedperiodsof
lowinterest rates,excessbalances(asdefinedbelow) could be
significant.
96.Any excessbalancesthat could be withdrawnand wouldstill leave
enough fundsto fulfil these clearing, custody and cash management
activitiesdo not qualify for the25% factor.
In other words,onlythat part of the deposit balancewith theservice
providerthat isproventoserveacustomer‘soperationalneedscanqualify
asstable.
Excessbalancesshould be treated in theappropriatecategoryfor
non-operational deposits.
If banks areunable todetermine the amount of the excessbalance,then
theentire deposit should be assumed tobe excessto requirements
and, therefore, considerednon-operational.
97.Banks must determinethemethodology for identifying excess
depositsthat are excluded from this treatment.
This assessment should be conductedat a sufficientlygranular level to
adequatelyassesstherisk of withdrawalin an idiosyncratic stress.
Themethodology should take intoaccount relevant factorssuch asthe
likelihoodthat wholesalecustomershave aboveaveragebalancesin

61
advanceof specific payment needs, and consider appropriateindicators
(egratios of account balancesto payment or settlement volumesor to
assetsunder custody) toidentify those customersthat are not actively
managingaccount balancesefficiently.
98.Operational depositswouldreceivea 0% inflowassumptionfor the
depositingbank given that thesedepositsare required for operational
reasons, and arethereforenot availabletothedepositingbank torepay
other outflows.
99.Notwithstandingtheseoperational categories, if thedeposit under
considerationarisesout of correspondent banking or from the provision
of prime brokerage services,it will betreated asif there wereno
operational activityfor the purpose of determining run-off factors.42
100.Thefollowingparagraphsdescribethe typesof activitiesthat may
generateoperational deposits.
Abank should assesswhetherthe presenceof such an activitydoes
indeedgeneratean operational deposit asnot all such activitiesqualify
duetodifferencesin customer dependency, activityand practices.
101.Aclearingrelationship, in this context, refers toa service
arrangement that enablescustomersto transfer funds(or securities)
indirectlythrough direct participantsin domestic settlement systems to
final recipients.
Such servicesare limitedtothe followingactivities:
transmission, reconciliationand confirmation of payment orders;
daylight overdraft, overnight financingand maintenanceof post-
settlement balances;anddetermination of intra-dayand final
settlement positions.
102.Acustodyrelationship, in this context, refers tothe provision of
safekeeping, reporting, processingof assetsor thefacilitation of the
operational and administrativeelementsof related activitieson behalf of
customersin the processof their transacting and retainingfinancial
assets.

62
Such servicesare limitedtothesettlement of securitiestransactions,the
transfer of contractual payments, the processingof collateral, and the
provision of custodyrelated cashmanagement services.
Also includedarethereceipt of dividendsand other income, client
subscriptionsand redemptions.
Custodial servicescan furthermore extend toasset and corporate trust
servicing, treasury, escrow,fundstransfer, stock transfer and agency
services, includingpayment and settlement services(excluding
correspondent banking), and depositoryreceipts.
103.Acashmanagement relationship, in this context, refers to the
provision of cash management and related servicesto customers.
Cash management services,in thiscontext, referstothoseproductsand
servicesprovided to a customer to manageitscash flows, assetsand
liabilities,and conduct financial transactionsnecessarytothecustomer‘s
ongoing operations.
Such servicesare limitedtopayment remittance, collectionand
aggregation of funds, payroll administration, and control over the
disbursement of funds.
104.Theportion of the operational depositsgeneratedby
clearing, custodyand cashmanagement activitiesthat is fullycovered
by deposit insurancecan receivethesame treatment as―stable‖ retail
deposits
(c) Treatment of depositsin institutional networks of
cooperative banks: 25% or 100%
105.An institutional networkof cooperative(or otherwisenamed) banks
is a group of legallyautonomousbankswith a statutoryframeworkof
cooperation withcommon strategic focusand brand wherespecific

63
functionsare performed by central institutionsor specializedservice
providers.
A25% run-off rate can be given to the amount of depositsof member
institutionswiththecentral institution or specialisedcentral service
providersthat areplaced
(a)dueto statutoryminimum deposit requirements,whichare registered
at regulatorsor
(b)in thecontext of common tasksharingand legal, statutory or
contractual arrangementssolong asboth the bank that hasreceivedthe
moniesand the bank that hasdepositedparticipatein the same
institutional network‘smutual protectionschemeagainst illiquidityand
insolvencyof itsmembers.
As withother operational deposits, thesedepositswould receivea 0%
inflowassumption for thedepositingbank, asthesefundsare considered
toremain withthe centralisedinstitution.
106.Supervisoryapproval wouldhave tobe given toensure that banks
utilisingthistreatment actuallyare the central institutionor a central
serviceprovider of such a cooperative(or otherwisenamed) network.
Correspondent bankingactivitieswouldnot beincludedin thistreatment
andwouldreceivea100%outflowtreatment, aswouldfundsplacedat the
central institutionsor specialised service providersfor anyother reason
other than thoseoutlined in (a) and (b) in the paragraph above, or for
operational functionsof clearing, custody, or cash management as
outlined in paragraphs101-103.

64
(d) Unsecured wholesalefunding provided by non-financial
corporatesand sovereigns, central banks, multilateral
development banks, and PSEs: 20% or 40%
107.This categorycomprisesall deposits and other extensionsof
unsecuredfunding from non-financial corporate customers(that are not
categorisedassmall businesscustomers) and (both domestic and foreign)
sovereign,centralbank, multilateraldevelopment bank, andPSE
customersthat are not specificallyheld for operationalpurposes(as
definedabove).
Therun-off factor for these fundsis40%, unlessthecriteria in
paragraph 108are met.
108.Unsecured wholesalefunding providedby non-financial corporate
customers,sovereigns,central banks, multilateraldevelopment
banks, and PSEswithout operational relationshipscan receivea 20%
run-offfactor if the entire amount of thedeposit is fully covered by an
effectivedeposit insurancescheme or by a public guaranteethat
providesequivalent protection.
(e) Unsecured wholesalefunding provided by other legal entity
customers: 100%
109.This categoryconsistsof all depositsand other fundingfrom other
institutions(includingbanks,securitiesfirms,insurance
companies,etc), fiduciaries,beneficiaries,conduitsand specialpurpose
vehicles,affiliatedentitiesof thebank and other entitiesthat are not
specificallyheld for operational purposes(asdefinedabove) and not
included in the
prior threecategories.
Therun-off factor for these fundsis100%.
110.All notes,bondsand other debt securitiesissued by the bank are
includedin this categoryregardlessof theholder, unlessthebond is sold

65
exclusivelyin the retail market and held in retail accounts(including
small businesscustomer accountstreated asretail per paragraphs89-
91), in whichcasethe instrumentscan be treatedin the appropriate retail
or small businesscustomer deposit category.
Tobe treated in thismanner, it isnot sufficient that the debt instruments
are specificallydesignedand marketed to retail or small business
customers.
Rather there should be limitationsplaced suchthat thoseinstruments
cannot be bought and held by partiesother than retail or small business
customers.
111.Customer cashbalancesarisingfrom the provision of prime
brokerage services,includingbut not limitedto the casharisingfrom
prime brokerageservicesasidentifiedin paragraph99, should be
consideredseparatefrom anyrequired segregatedbalancesrelated
toclient protection regimes imposed bynational regulations, and should
notbenettedagainst other customerexposuresincludedin thisstandard.
Theseoffsettingbalancesheld in segregatedaccountsare treated as
inflowsin paragraph 154and should be excluded from thestock of
HQLA.
(iii) Secured funding run-off
112.For the purposesof thisstandard, ―securedfunding‖ is defined as
thoseliabilitiesand general obligationsthat are collateralisedby legal
rightstospecificallydesignatedassetsownedby the borrowing
institution in the caseof bankruptcy, insolvency, liquidationor
resolution.
113.Lossof secured fundingon short-term financingtransactions:In this
scenario, the ability tocontinueto transact repurchase,reverserepurchase
and other securitiesfinancingtransactionsislimitedto
transactionsbacked by HQLAor withthebank‘sdomestic

66
sovereign, PSE or central bank.
Collateral swapsshould be treated asrepurchaseor reverserepurchase
agreements, asshould any other transactionwitha similar form.
Additionally, collateral lent to thebank‘scustomersto effect short
positionsshould betreated asa form of secured funding.
For thescenario, a bank should applythefollowingfactorstoall
outstandingsecuredfunding transactionswithmaturitieswithin the 30
calendar daystresshorizon, includingcustomer short positionsthat do
not have a specifiedcontractual maturity.
Theamount of outflowis calculatedbased on the amount of fundsraised
through thetransaction, and not thevalue of theunderlying collateral.
114. Due to the high-qualityof Level 1assets,noreduction in funding
availability against these assetsisassumed to occur.
Moreover,noreduction in funding availability is expectedfor any
maturing securedfunding transactionswith thebank‘sdomesticcentral
bank.
Areduction in fundingavailability will be assignedtomaturing
transactionsbacked by Level 2 assetsequivalent to the requiredhaircuts.
A25% factor isappliedfor maturing secured funding transactionswith
thebank‘sdomestic sovereign, multilateral development banks, or
domesticPSEsthat have a 20% or lowerrisk weight, whenthe
transactionsare backed by assetsother thanLevel 1or Level 2Aassets,in
recognition that theseentitiesare unlikelyto withdraw secured funding
from banks in a time of market-widestress.
This, however, givescredit only for outstandingsecured funding
transactions,and not for unused collateralor merelythe capacityto
borrow.

67
115. For all other maturing transactionstherun-off factor is
100%, includingtransactionswherea bank hassatisfiedcustomers‘
short positionswithitsown longinventory.
Thetablebelow summarisesthe applicablestandards:
(iv) Additional requirements
116. Derivativescashoutflows:thesum of all net cashoutflowsshould
receivea 100% factor.
Banks should calculate, in accordancewiththeir existing valuation
methodologies, expected contractual derivativecashinflowsand
outflows.
Cash flowsmay be calculatedon a net basis(ie inflowscan offset
outflows)by counterparty, onlywherea valid master nettingagreement
exists.
Banks should excludefrom such calculationsthoseliquidity
requirementsthat wouldresult from increased collateral needsdueto
market valuemovementsor fallsin value of collateral posted.

68
Optionsshould be assumed tobe exercisedwhentheyare ‗in themoney‘
tothe option buyer.
117.Where derivativepaymentsare collateralisedby HQLA, cashoutflows
should be calculatednet of any correspondingcash or collateral inflows
that would result, all other thingsbeing equal, from contractual
obligationsfor cash or collateral to beprovided tothe bank, if thebank is
legallyentitledand operationallycapableto re-usethe collateralin new
cashraising transactionsonce the collateral is received.
This is in linewiththe principlethat banks should not double count
liquidityinflowsand outflows.
118.Increased liquidityneedsrelatedtodowngradetriggersembeddedin
financingtransactions,derivativesand other contracts: (100%of the
amount of collateral that wouldbe posted for, or contractual cashoutflows
associatedwith, anydowngradeup toand includinga 3-notch
downgrade).
Often, contractsgoverningderivativesand other transactionshave
clausesthat require theposting of additional collateral, drawdownof
contingent facilities,or earlyrepayment of existingliabilitiesupon the
bank‘sdowngradeby a recognisedcredit rating organisation.
Thescenario therefore requiresthat for each contract in which
―downgradetriggers‖ exist, thebank assumesthat 100%ofthisadditional
collateral or cash outflowwill have tobe posted for anydowngradeup to
and includinga 3-notchdowngradeof the bank‘slong-term credit rating.
Triggerslinked toa bank‘sshort-term ratingshould be assumed tobe
triggeredat the correspondinglong-term rating in accordancewith
publishedratingscriteria.
Theimpact of the downgradeshould consider impactson all types of
margin collateraland contractual triggerswhichchange rehypothecation
rightsfor non-segregatedcollateral.

Basel 3 January 2013

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Basel 3 January 2013