LCR (Liquidity Coverage Ratio) and NSFR (Net Stable Funding Ratio) are two key regulatory measures that assess a financial institution's ability to meet its liquidity needs during both normal and stressed market conditions.
Liquidity Coverage
Ratio (LCR):
LCR
is a regulatory requirement that measures a financial institution's ability to
meet its short-term liquidity needs under stressed market conditions. The LCR
requires the institution to maintain a sufficient stock of high-quality liquid
assets (HQLA) that can be quickly converted into cash to cover its net cash
outflows over a 30-day period. The LCR is calculated by dividing the
institution's stock of HQLA by its expected net cash outflows over the next 30
days.
For
example, suppose a bank has a total stock of $100 million in HQLA and is
expected to experience net cash outflows of $50 million over the next 30 days.
In that case, the bank's LCR would be calculated as:
LCRHQLA/Net
cash outflows over the next 30 days = $100 million/$50 million =2.0
In
this example, the bank's LCR is 2.0, indicating that it has sufficient liquid
assets to cover its expected cash outflows for the next 30 days.
NSFR
is a regulatory requirement that measures a financial institution's ability to
maintain a stable funding profile over a one-year horizon. The NSFR requires
the institution to maintain a stable funding mix between its assets and
liabilities, ensuring that it has a sufficient amount of stable funding to
support its activities. The NSFR is calculated by dividing the institution's
available stable funding (ASF) by its required stable funding (RSF) over a
one-year horizon.
For
example, suppose a bank has $100 million in assets, of which $80 million are
funded by stable sources such as customer deposits, and $20 million are funded
by short-term liabilities. In that case, the bank's NSFR would be calculated
as:
NSFR
ASF/RSF=$80 million/$100 million = 0.8
MCO
reflects the maximum cumulative outflow against total assets in a maturity
bucket. MCO up to one month bucket should not be greater than the sum of daily
minimum CRR plus SLR. For example, at the present rate of CRR and SI.R, the MCO
should be 19% (6% CRR+ 13% SLR) for conventional banks. The Shariah-based
banks, due to higher ADR and the Short nature of their investment are also
allowed MCO at the same level. MCO in the other maturity buckets should be
prudently fixed by the BODs (ALCO in the case of foreign banks) depending on the
bank's business strategy. The board should take utmost care in setting these
ratios as they have a significant impact on the bank's business strategy.
(Total Inflows + Net nostro
Account Balance + Available Foreign Currency
Balance with BB)
Banks
should follow the instruction of BB (Dos circular no-02, dated: 29/03/2011)
regarding preparation of Structural Liquidity Profile (SLP). Using the above
equation bank should calculate MCO in other time buckets.