Reviewing LCR Delegated Act, Reforms And The Impact On The Industry - - PowerPoint PPT Presentation

Date: 24 May 2016 Risk EMEA 2016 Christopher Blake Group Asset Liability and Capital Management HSBC

Reviewing LCR Delegated Act, Reforms And The Impact On The Industry

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Basel 3/CRR – Liquidity Coverage Ratio- A quick review Remember a liquidity ratio is really about the size of your insurance policy when a crisis of confidence occurs:

Stock of high quality liquid assets Net cash outflows over a 30-day time period > 100%

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ALCM

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Stock of High Quality Liquid Assets

• Level 1, level 2A and level 2B liquid assets

Cash outflows

• Retail deposits
• Wholesale deposits
• Off BS lending commitments
• Derivative outflows
• Wholesale funding outflows

Cash inflows

• Loan payments
• Reverse repos / stock borrowing

transactions

Stock of High-Quality Liquid Assets (HQLA)

• Total net (stressed) cash outflows over the next 30 days

LCR

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ALCM Implications still to be understood around the LCR

Compliance

• Does everyone know the definition of customer types
• Operational deposits- what is it?
• Pillar II add-ons

External reporting comparability

• Level of the LCR
• Annual report and Accounts
• Trapped Liquidity and connection to Branch and Subsidiary liquidity

Connection's to other ratios

• Leverage
• NSFR
• Capital- TLAC

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ALCM Customer classification types

Why does this matter

• The value for both LCR and NSFR of any type of deposit is a function of the customer
• classification. However if is sometimes increasingly unclear what the classification is.

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Customer ¡Classifica/on ¡Type ¡ Ease ¡of ¡ ¡classifica/on ¡ Retail ¡ Y ¡ SME/Retail ¡Corporates ¡ ? ¡ PIC’s/Trusts ¡ Y ¡ Banks ¡ Y/? ¡ Non-­‑Bank ¡Financials ¡ Y ¡ Central ¡Bank ¡ Y/? ¡ Sovereign ¡Wealth ¡Fund ¡ ? ¡ Public ¡Sector ¡En/ty ¡ ? ¡ Corporate ¡ ? ¡

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LCR Recap Value of customer deposits from a LCR perspective

Low liquidity value 0% High liquidity value 100%

LCR value

Deposits from banks <30 days Non

• perational

NBFI Corporate non

• perational /

term < 30 days Corporate/ NBFI

• perational

deposits SME Retail Stable Wholesale term Deposits > 30 Days

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What is an operational deposit ?

• Deposits shall have significant legal or
• perational limitations that make significant

withdrawals within 30 calendar days unlikely

• Priced without creating incentives for the

depositor to maintain funds in excess than what is needed for the operational relationship

• Funds in excess of those required for the

provision of operational services shall be treated as non operational.

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ALCM Pillar 2 add-ons. Will these be implemented equally both within and across jurisdictions?

Current limits

• Intraday liquidity risk
• Debt buy-back
• Un-margined derivatives tear up
• Prime Brokerage
• Cashflow mismatch
• Cliff risk
• Underwriting risk
• Settlement failure
• Matched trading books

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ALCM Connections to other ratios

LCR to NSFR

• The LCR definitions mainly drive the value of deposits within the NSFR

LCR to Leverage

• If deposits have no liquidity value, they have no funding value, so they can only go into liquid

assets, this also effects the leverage ratio. The return on leverage ratio will not be commensurate with the implied cost of capital.

• Implication – keep or not keep deposits ?

TLAC/MREL to LCR, NSFR and Leverage

• TLAC/MREL improves LCR/NSFR, but at an increased cost
• All else being equal TLAC/MREL impacts leverage, therefore the implication is that TLAC/

MREL must replace shorter term funding.

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Net Stable Funding Ratio (NSFR)

Available Stable Funding Required Stable Funding NSFR =

Available stable funding is derived from the liability base. Required stable funding is derived by applying haircuts to the quantum of loan balances which require funding.

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Net Stable Funding Ratio

• Liabilities
• Available stable funding (ASF)
• Semi-stable funding
• Assets

– Assets requiring stable funding (RSF) – Semi-stable funding

Off Balance Sheet Non stable funding (<30d) Required Stable Funding(RSF) (>1y funding) Semi stable funding (>1m<1y) Semi stable funding (>1m<1y) Available Stable Funding (ASF) (>1y funding) Non Stable funding (<30 days) NSFR

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LCR

Questions?

PUBLIC Christopher Blake HSBC Group Asset Liability and Capital Management