Reviewing LCR Delegated Act, Reforms And The Impact On The Industry Risk EMEA 2016 Date: 24 May 2016 Christopher Blake Group Asset Liability and Capital Management HSBC PUBLIC
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 > 100% Net cash outflows over a 30-day time period 2 PUBLIC
ALCM LCR Stock of High Quality Liquid Assets • Level 1, level 2A and level 2B liquid assets Stock of High-Quality Liquid Assets (HQLA) ---------------------------------------------------------------------------------- Total net (stressed) cash outflows over the next 30 days Cash outflows Cash inflows • Retail deposits • Loan payments • Wholesale deposits • Reverse repos / stock borrowing • Off BS lending commitments transactions • Derivative outflows • Wholesale funding outflows PUBLIC 3
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 PUBLIC 4
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. 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 ¡ ? ¡ PUBLIC 5
LCR Recap Value of customer deposits from a LCR perspective Deposits Non Corporate Corporate/ SME Retail Stable Wholesale from banks operational non NBFI term <30 days NBFI operational / operational Deposits > term < 30 deposits 30 Days days LCR value Low High liquidity liquidity value value 0% 100% 6 PUBLIC
ALCM What is an operational deposit ? • Deposits shall have significant legal or operational 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. PUBLIC 7
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 PUBLIC 8
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. PUBLIC 9
ALCM Net Stable Funding Ratio (NSFR) Available Stable Funding NSFR = Required Stable Funding 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. PUBLIC 10
Net Stable Funding Ratio • Liabilities • Assets - Available stable funding (ASF) – Assets requiring stable funding (RSF) - Semi-stable funding – Semi-stable funding Available Stable Required Stable Funding (ASF) NSFR Funding(RSF) (>1y funding) (>1y funding) Semi stable funding Semi stable funding (>1m<1y) (>1m<1y) Non Stable funding Non stable funding LCR (<30 days) (<30d) Off Balance Sheet 11 PUBLIC
Questions? Christopher Blake HSBC Group Asset Liability and Capital Management PUBLIC
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