All Currency LCR (Must-know about Basel-3: Liquidity Coverage Ratio (LCR) and Notional Cash Pools.)

In this example we will look at the bank’s balance sheet for the purpose of calculating the All Currency LCR. ① From a gross perspective the banks has i) debit balances, loans to clients, in various currencies, amounting to EUR 250 (short), and ii) credit balances, deposits from clients, in various currencies, amounting to EUR 260 (long). ② The gross offset is consequently EUR 250. ③ Netted this results in EUR 10 a liability, recorded as “funds entrusted” (or “clients”) on the balance sheet, as well as an asset “banks” as the funds are invested elsewhere (most likely to generate yield). ④ The bank can recognize EUR 10 “banks” as a future inflow. This is taken into account for 100%. ⑤ The bank needs to recognize EUR 10 “clients” as potential (non-operational) outflow. ⑥ This needs to be taken into account for (on average) 40% ⑦ The Net All Currency LCR is 6 long. ⑧ The amount of gross offset ② appears on both the debit as well as the credit side of the bank’s balance sheet. It is therefore both an inflow as well as an outflow. But even though the amount is the same, the inflows and outflows do not cancel each other out. Inflow is taken into account for 20%, outflow for 25%. This results in a gross effect of EUR 12,5. ⑨ The All Currency LCR impact. The amount the bank needs to hold in HQLA to meet the All Currency LCR requirement.

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