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Basel III - Liquidity ratios February 13, 2013
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2 Views or opinions in this presentation are solely those of the presenter and do not necessarily represent those of ICICI Bank Limited
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3 Background Basel Committee of Banking Supervision (BCBS) had proposed two liquidity ratios in December 2009 Liquidity coverage ratio (LCR) High quality liquid assets available to meet net cash outflows for a 30 day time horizon under stress scenario Net stable funding ratio (NSFR) Requires minimum stable funding over a 1 year horizon based on liquidity risk factors assigned to assets and off- balance sheet liquidity exposure Quantitative Impact Study (QIS) to analyse impact of liquidity ratios started from March 2011
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4 Liquidity coverage ratio (LCR) Definition: Stock of high quality liquid assets Net cash outflows over a 30 day period Minimum level of 60% to be maintained by 2015 with a 10% increase every year till 100% in 2019 Both systemic shocks and institution specific stress considered to arrive at net cash outflows Net cash outflows Liquid assets
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5 Net stable funding ratio (NSFR) Definition Available amount of stable funding Required amount of stable funding Minimum level of 100% to be maintained by 2018 To lead to structural change in liquidity risk profiles towards longer term stable funding Available stable funding Required stable funding
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6 Key challenges Treatment of CRR/SLR as a part of liquid asset Significant portion of CRR/SLR not allowed to be considered as liquid assets Customer term deposits have premature withdrawal Due to premature withdrawal option, higher outflows are considered in LCR computation and lower stable funding factor in NSFR computation Lower proportion of insured deposits Insured deposits forms small portion of the total deposit base, leading to higher outflows in the LCR computation
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RBI - Liquidity Guidelines Issued on November 7, 2012
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8 Governance of liquidity risk management Board should decide the strategy, policies & procedures to manage liquidity risk Understand the nature of liquidity risk of the bank, including branches, subsidiaries & associates Liquidity risk management policy to cover material subsidiaries, JVs & associates
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9 Management of liquidity risk (1/2) Banks should have sound process to identify, measure, monitor & mitigate liquidity risk Extend liquidity gap limits currently applicable for domestic-INR gaps to overseas operations (country-wise) Liquidity gap statement for overseas branches to be prepared daily Recommended to be extended to consolidated domestic operations (INR & FC) & consolidated Bank operations
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10 Management of liquidity risk (2/2) Short-term dynamic liquidity gap statement to be extended to overseas branch operations (jurisdiction wise and overall) Assumptions used in cash flow projections should be transparent to the Board/Risk Committee and reviewed periodically Set of illustrative liquidity ratios provided for domestic operations and also for major currencies viz. USD, GBP, EUR and JPY. Ratios are only illustrative and banks can also use other measures/ratios
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11 Overseas operations of Indian bank’s branches & subsidiaries Banks should provide detailed procedures & guidelines for their overseas branches / subsidiaries to manage their operational liquidity on an ongoing basis Monitor two ratios for overseas operations (consolidated & separately for currencies >10% of consolidated overseas balance sheet) Long & medium term resources/long & medium term assets Long term resources to long term assets ratios
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12 Stress testing Conduct stress tests on various short term & protracted bank specific & market-wide stress scenarios Individually & in combination Stress test results should assist bank’s contingent funding planning and form strategy to deal liquidity stress situation Risk tolerance may also be expressed in terms of minimum survival horizons
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13 Contingency funding plan (CFP) Banks to formulate CFP to respond to severe disruptions, which might affect the bank’s ability to fund some or all of its activities in a timely manner and at a reasonable cost Contingency plans must be tested regularly to ensure their effectiveness and operational feasibility To be reviewed by the Board at least on an annual basis
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14 Collateral position management Maintain sufficient collateral for expected & unexpected borrowings, increased margin requirements, and pledging/delivery of additional intra-day collateral in case of operational/liquidity disruption Have systems & procedures in place to assess/compute collateral requirements, pledged assets & unencumbered assets
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15 Intra-day liquidity position management Banks to monitor intra-day liquidity requirements Have policies, procedures and systems to support intra-day liquidity risk management in all financial markets and currencies in which it has significant flows Develop and adopt an intra-day liquidity strategy to monitor and measure expected daily gross liquidity flows
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16 Thank you
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17 LCR: Liquid assets Liquid assetsWeightage Level 1 - Cash100% - Central Bank reserve100% - Domestic G-Sec or AAA rated sovereign securities100% Level 2 (Maximum 40% of total liquid assets) Level 2A Corporate debt rated AA- or better85% Level 2B (Maximum 15% of total liquid assets) Corporate debt rated between A+ and BBB-50% Common equity shares (constituent of a major stock index)50%
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18 Liquid assetsFactor Cash outflows Retail/SME deposits5%/10% Corporate deposits25%/40% Funding from legal entities100% Debt maturing < 30 days100% Undrawn committed credit & liquidity facilities5% - 100% LC/BG2% Net derivative flows100% Cash inflows (Maximum 75% of total cash outflows) Receivables from retal/SME/corporate customers50% Payments on loans and deposits < 30 days from FI’s100% Net derivatives receivables100% LCR: Net cash outflows
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19 NSFR: Available Stable Funding ParticularsWeightage Tier I & II capital100% Retail/SME deposits80% Corporate deposits50% Debt issued (> 1 year)100% Funding from other entities (> 1 year)100%
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20 NSFR: Required Stable Funding ParticularsWeightage Level 1 liquid assets > 1 year5% Level 2 liquid assets > 1 year20% Listed equity50% Corporate bonds rated A+ to A- > 1 year50% Loans to non-financial corporate < 1 yr50% Loans to retail clients < 1yr85% Other assets (Advances & investments not covered above, Fixed assets, etc.) 100% Undrawn committed credit and liquidity facilities5% Unconditionally revocable credit and liquidity facilities6% LC/BG2%/3%
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21 Indicative liquidity ratios as per RBI Sr.Illustrative RatioDirection Industry average 1.(Volatile liabilities – Temporary assets)/(Earning assets – Temporary assets) Maximum40% 2.Core deposits to total assetsMinimum50% 3.(Loans + mandatory SLR & CRR + Fixed assets)/Total assets Maximum80% 4.(Loans + mandatory SLR & CRR+ Fixed assets)/Core deposits Maximum150% 5.Temporary assets to total assetsMinimum40% 6.Temporary assets to volatile liabilitiesMinimum60% 7.Volatile liabilities to total assetsMaximum60%
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22 Ratio components - RBI Volatile Liabilities Deposits, borrowings & bills payable upto 1 year CASA payable within 1 year Borrowings - from RBI, call, other institutions & refinance LC (full outstanding), component-wise CCF of other contingent credit & commitments, swap funds (buy/ sell) upto 1 year Temporary Assets Cash, Excess CRR, Balances with banks, Bills purchased / discounted upto 1 year, Investments upto 1 year & Swap funds (sell/ buy) upto 1 year Earning Assets Total assets (Less) Fixed assets, Balances in current accounts with other banks, other assets excluding leasing & Intangible assets Core Deposits All deposits above 1 year + net worth
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23 CAMELS – Capital adequacy, Asset quality, Management competence, Earnings ability, Liquidity risk, Sensitivity to market risk List of CAMELS ratios for liquidity Customer deposits to total assets ratio Net loans to customer deposits ratio Time deposits to total deposits ratio Bulk deposits to total deposits ratio Liquid assets to total assets ratio Funding volatility ratio Market liabilities ratio Deposits maturing within one year to total deposits ratio
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