a.The LCR consists of two components: HQLA (Shari’ah-compliant) as the numerator and net cash outflows over the next 30 days as the denominator, both in a stress scenario. The HQLA are the assets that can be easily and immediately converted into cash, with no or little loss of value, during a time of stress. The total net cash outflows will be calculated as the total expected cash outflows minus total expected cash inflows in the specified stress scenario for the subsequent 30 calendar days.
b.The formula for calculating LCR, therefore, is as follows:
c.Total expected cash inflows are calculated by multiplying the outstanding balances of various categories of contractual receivables by the rates at which they are expected to flow in under the specified scenario up to an aggregate cap of 75% of total expected cash outflows. There is a cap applied on total cash inflows in order to prevent IBs from relying solely on anticipated inflows to meet their liquidity requirements, and also to ensure a minimum level of HQLA holdings. Accordingly, the amount of inflows that can offset outflows is capped at 75% of total expected cash outflows. Therefore, by applying this cap, the IB is required to hold a minimum amount of stock of HQLA equal to 25% of the total net cash outflows.
d.
Total net cash outflows over the next 30 calendar days
=
Total gross expected cash outflows
-
Lesser of (total expected cash inflows; 75% of total expected cash outflows)
e.The LCR requirement is based on a scenario that entails a combination of idiosyncratic and market-wide shocks; nevertheless, IBs must develop its own scenarios based on liquidity stress testing of their portfolio. IBs must hold more HQLA if the results of their stress tests indicate that this is necessary. Such internal stress tests must incorporate longer time horizons than that mandated by this Standard. IB is expected to share the results of these additional stress tests with the Central Bank.
