BASEL III LIQUIDITY

FRAMEWORK

By Jawwad Ahmed Farid

B A S E L I I I - L I Q U I D I T Y F R A M E W O R K

TABLE OF CONTENTS
BASEL III LIQUIDITY FRAMEWORK REFORMS TO GLOBAL LIQUIDITY RISK REGULATIONS ....................................... 4
1.1 INTRODUCING THE SUPERVISORY APPROACH GLOBAL LIQUIDITY RATIO STANDARDS ......................................... 4
1.1.1 Liquidity Coverage Ratio (LCR) The Numerator: Value of Stock of High Quality Liquid Assets .. 5
1.1.2 Liquidity Coverage Ratio (LCR) The Denominator: Total Net Cash Outflows ............................. 7
1.1.2.1 Cash outflow categories ................................................................................................ 7
1.1.2.2 Cash inflow categories ................................................................................................... 8
1.1.3 Liquidity Framework Net Stable Funding Ratio (NSFR) .............................................................. 8
1.1.3.1 Available amount of Stable Funding (ASF) .................................................................... 9
1.1.3.2 Required amount of Stable Funding (RSF) ..................................................................... 9
1.2 METRICS FOR MONITORING LIQUIDITY RISK ............................................................................................ 10
1.2.1.1
1.2.1.2
1.2.1.3
1.2.1.4
1.2.1.5

Contractual maturity mismatch ..................................................................................... 10

Concentration of funding .............................................................................................. 10
Available unencumbered assets .................................................................................... 11
LCR by significant currency ............................................................................................ 11
Market-related monitoring tools ................................................................................... 11
A FRAMEWORK FOR ESTIMATING LIQUIDITY RISK CAPITAL FOR A BANK ................................................................... 12
2.1 ICAAP CAPITAL ESTIMATION FOR LIQUIDITY RISK MANAGEMENT ............................................................... 12
2.2 LIQUIDITY RESERVES: REAL OR A MIRAGE .............................................................................................. 13
2.3 ESTIMATING CAPITAL FOR LIQUIDITY RISK: THE FRAMEWORK ..................................................................... 16
CASE STUDIES ........................................................................................................................................... 17
3.1 CASE STUDY: BEAR STEARNS ............................................................................................................... 17
3.1.1 The beginning of the Name crisis .................................................................................................. 17
3.1.2 Timelines ....................................................................................................................................... 20
3.2 CASE STUDY: LEHMAN BROTHERS ........................................................................................................ 21
3.2.1 Timelines ....................................................................................................................................... 23
3.3 CASE STUDY: AMERICAN INTERNATIONAL GROUP (AIG) ........................................................................... 25
3.3.1 Timelines ....................................................................................................................................... 27
DISCLAIMER .............................................................................................................................................. 29

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