a.LCR is the ratio of the stock of High Quality Liquid Assets (“HQLA”) to total net cash outflows over the next 30 days. It represents a 30 days stress scenario with combined assumptions covering both bank specific and market wide stresses.
b.The objective of the LCR is to promote IBs’ resilience against short-term liquidity shocks. To meet this requirement, an IB is obliged to have an adequate stock of unencumbered HQLA that can be converted easily and immediately into cash with no or little loss of value, in order to meet its liquidity needs for a 30-calendar-day period under a liquidity stress scenario. This is based on the assumption that, if the requirement is met, the IB could survive for the 30 days of the given stress scenario. This period allows the IB an adequate time to make necessary arrangements and undertake corrective actions to resolve internal liquidity problems.
c.Therefore, the LCR is based on the assumption that a combined set of idiosyncratic and market-wide shocks may trigger the run-off of a proportion of retail deposits, including investment accounts, and a partial loss of unsecured wholesale funding capacity. The LCR is also developed based on the possibility that stressed market conditions would result in a partial loss of secured, short-term financing with certain collateral and counterparties, and an increase in market volatilities that impact the quality and solvency of the collateral, given that many IB’s transactions are backed by physical assets. In volatile market conditions, an IB may encounter additional contractual outflows and unscheduled drawdowns of committed but unused credit and liquidity facilities. Similarly, IB could find itself compelled to honor non-contractual obligations for the sake of avoiding the reputational risk that would arise from a perception by the market that the IB was, for example, allowing a related entity to become insolvent.