Guide to Implementing the Liquidity Coverage Ratio Standard

Guide to Implementing the Liquidity Coverage Ratio Standard

Introduction: The Basel Committee on Banking Supervision issued in January 2013 the standard for banking reforms titled "Liquidity Coverage Ratio and Liquidity Risk Monitoring Tools" in its final form, aimed at enhancing the resilience of the banking sector. According to this standard, the Liquidity Coverage Ratio is measured as follows:

Liquidity Coverage Ratio = High-Quality Liquid Assets / Net Cash Outflows over 30 days ≥ 100%

This means that in all circumstances, the Liquidity Coverage Ratio must not fall below 100% (i.e., High-Quality Liquid Assets must be at least equal to net cash outflows).

The Central Bank aims to adopt this standard to enhance banks' risk management by improving access to information from various operations and assessing the impact of external events on the liquidity of financial instruments and the availability of funding under normal and stressed conditions. Implementing this new liquidity standard alongside other regulatory standards issued by the Central Bank for liquidity risk management will give market participants greater confidence in the banking sector's ability to absorb shocks resulting from financial and economic pressures, thereby reducing the likelihood of severe liquidity shortages.

Chapter One: Definitions The following terms must be understood wherever they appear in these guidelines for the purposes of the Liquidity Coverage Ratio standard:

1. Current Market Value: Refers to the market value of liquid assets that fall under the High-Quality Liquid Assets stock.
2. Stressed Conditions (Crisis Times): Refers to circumstances where the bank is unable or faces difficulties in meeting its financial obligations when due due to specific bank-related conditions or external stressful circumstances. In such conditions, the bank may face difficulties accessing funding sources and may not have a reasonable alternative to liquidating High-Quality Liquid Assets to meet its obligations, for example:
   • Deposit withdrawals.
   • Providing additional collateral requirements or unexpected liquidity needs of a counterparty or repurchasing debt.
   • Servicing unexpected withdrawals on undrawn credit limits and other facilities granted to the bank's customers.
   • To mitigate reputational risk.
3. Haircut: Refers to a percentage applied to reduce the market value of an asset (collateral). A haircut is applied as a risk mitigation measure to protect against losses resulting from a decline in the market value of a specific asset (collateral) if it needs to be liquidated.
4. High-Quality Liquid Assets (HQLA): Assets are considered High-Quality Liquid Assets if they can be converted easily and immediately into cash at no loss, or with only a negligible loss of value, under stressed conditions.
5. Non-HQLA: Refers to financial debt instruments and equity shares that do not qualify as Level 1 or Level 2 assets.
6. Operational Deposits: Means deposit accounts held by a wholesale client primarily to obtain specific operational services from the bank through a third-party intermediary or agent.
7. Operational Services: Include services provided by the bank related to clearing and cash management operations (excluding correspondent and brokerage activities) that facilitate the client's access to and use of payment and settlement systems.
8. Retail Deposits: Deposits obtained by the bank from individual customers, including sole proprietorships, partnerships, and those enterprises classified as small and medium-sized.
9. Securities Financing Transactions (SFTs): Include repurchase agreements, securities lending and borrowing transactions, and margin lending transactions where the transaction value differs based on market valuation and transactions are typically subject to margin agreements.
10. Secured Financing (Liabilities): Refers to a debt or general obligation of the bank arising from covered securities transactions backed by collateral in the form of a mortgage on real estate, a pledge, or a lien on a specific asset owned by the bank, giving the counterparty priority in the asset in case of bankruptcy, financial distress, liquidation, or resolution.
11. Secured Lending: Refers to securities transactions subject to a legally binding agreement that gives the bank priority in a specific asset owned by the counterparty and pledged to the bank in case of bankruptcy, financial distress, liquidation, or resolution.
12. Unencumbered Asset: Means free from any apparent or implicit legal, regulatory, tax, accounting, or contractual restrictions that affect the bank's ability to liquidate the asset by selling or transferring ownership.
13. Money-in-the-Bank: Contracts are in this position when there is an economic benefit resulting from the immediate execution of the contract. A sale contract is in this position when the price of the contract subject (reference instrument) is higher than the exercise price. A put contract (purchase) is in this position when the price of the contract subject (reference instrument) is lower than the exercise price.

Chapter Two: General Provisions -1 Banks must comply with the Liquidity Coverage Ratio requirements and report them for all currencies denominated in USD. However, banks are also required to monitor their liquidity requirements for each significant currency separately, using the same models prepared for all currencies on the LCR calculation date. A currency is considered "significant" if the bank's total liabilities in that currency account for 5% or more of the bank's total liabilities across all currencies on the LCR calculation date. The Central Bank expects banks to meet their liquidity needs for each currency and maintain adequate high-quality assets for the liquidity needs of each currency. -2 The stressed outflow scenario generated under the LCR is considered a minimum regulatory requirement, and each bank must conduct specific stressed scenario assessments as part of its liquidity risk management process to identify risk factors that could lead to significant fluctuations in liquidity positions. Accordingly, banks must be able to assess the liquidity levels that should be maintained, which may be higher than regulatory minimums due to the bank's specific risks. -3 The Central Bank's specific requirements for the Liquidity Coverage Ratio are generally consistent with the Basel III framework. -4 Banking systems must be capable of calculating their liquidity positions on a daily basis, regardless of the reporting cycle requested by the Central Bank. These systems must, at a minimum, contain specific information related to unencumbered assets, collateral, and cash flows, as well as specific liquidity and marketability indicators outlined in this standard. Systems must be capable of extracting detailed and updated information, particularly under stressed conditions.

Chapter Three: High-Quality Liquid Assets (Numerator of the Ratio) .1 Criteria for Qualifying High-Quality Liquid Assets Assets are generally considered high-quality if they can be converted easily and immediately into cash at no loss, or with only a negligible loss of value, under stressed conditions. .1.1 Basic Characteristics: a- Low credit and market risk: Assets with low credit and market risk are highly liquid. Regarding credit risk, the issuer's high creditworthiness increases the asset's liquidity. Regarding market risk, the asset's short maturity, low price volatility, low inflation risk, and denomination in a convertible currency with low exchange rate risk all contribute to higher asset liquidity. Consequently, market participants do not fear the possibility of a decline in the asset's value. b- Ease of valuation and reliability: Asset liquidity increases when there is a higher probability of market participants agreeing on the asset's valuation. The pricing formula for highly liquid assets must be easy to measure and not based on numerous assumptions. Therefore, a clear and widely accepted instrument for asset valuation must be available. c- Low correlation with risky assets: High-Quality Liquid Assets must not have a high correlation with other assets. Therefore, high-quality assets do not include instruments issued by financial institutions, as they are the least liquid assets during stress periods. d- Listed in a developed and deep securities market: The asset must be listed in developed financial markets, which increases pricing transparency and enhances liquidity. .1.2 Market-Related Characteristics: a- Active and deep financial markets: There must be active trading of assets in the markets, with continuous buy and sell operations. These markets must be wide and deep, in addition to having a large and diverse number of market participants and committed market makers. b- Lower volatility: The probability of converting the asset to cash with minimal loss in value increases if there is documented evidence that the asset is less susceptible to price fluctuations, even during crises. c- Historical tendency to be sought during crises: Historical experience shows a tendency to resort to these types of assets during crises, considering them high-quality. .1.3 Operational Characteristics: The bank must comply with specific operational requirements as follows: a- Availability of the asset:

• All High-Quality Liquid Assets must be unencumbered, meaning these assets are free from any legal, regulatory, contractual, or other restrictions that affect the bank's ability to liquidate, sell, or transfer these assets. The liquid assets must not be used to cover the bank's trading positions or as collateral or credit enhancement or as a means to cover operational costs (such as rent and salaries).
• The bank must prepare assets that meet the definition of "unencumbered" as stated above if it does not have the ability to liquidate these assets under stressed conditions. The ability to liquidate assets requires appropriate procedures and systems that provide all required information to execute the liquidation of any asset at any time.
• The asset must not be under the control of another party unless the bank has the legal right to retrieve it and no other party can obtain it within a 30-day period.
• The bank must retrieve assets that have sales restrictions, such as those applicable to large sales transactions, which could cause the bank to exceed prescribed solvency criteria or requirements to hold these assets. b- Accessibility and use of the asset:
• The liquidatable asset must be under the bank's control (e.g., Treasury department) or another entity responsible for the bank's liquidity risk management. The relevant department must have the necessary legal and operational authority to liquidate assets, which can be achieved through the following:
• Keeping liquid assets within a special group managed by the relevant department for use only to provide funding sources in emergency situations.
• The bank must demonstrate the relevant department's ability to liquidate assets at any time within a 30-day period (stress period), and the resulting proceeds must be available for use in emergencies without conflicting with business strategies and risk management strategies.
• The usability of liquid assets must be tested regularly according to the nature of the instruments (e.g., repurchase agreements) to assess the possibility of accessing the market and the efficiency of the entire operation.
• Assets received in reverse repurchase transactions and securities financing transactions, held by banks, which have not been re-pledged, and are available for the bank's use, are considered part of the High-Quality Liquid Assets.
• Banks must take into account monitoring the concentration of all High-Quality Liquid Assets and establish a specific policy for monitoring the concentration of these assets and ensuring their diversification.

.2 Levels of High-Quality Liquid Assets The following is a list of assets that meet the aforementioned characteristics and can be used by banks to cover the Liquidity Coverage Ratio as High-Quality Liquid Assets: .2.1 Level 1 (No haircut applied) a- Cash and coins. b- Balances at central banks, including the mandatory cash reserve at the Central Bank. c- Marketable financial debt instruments, consisting of claims on sovereigns, central banks, public sector entities, the Bank for International Settlements, the International Monetary Fund, the European Central Bank, or multilateral development banks, or claims guaranteed by them, provided they meet the following criteria:

• They must take a zero risk weight according to the Basel II standardized approach for credit risk.
• They must exist in deep and developed markets, with the ability to conduct immediate sales or repurchase transactions, and exhibit low concentration levels.
• They have a proven track record as a reliable source of liquidity in markets (sales or repurchase) even during stressed market conditions.
• They do not include obligations to a financial institution or any of its subsidiaries. .2.2 Level 2 Level 2 assets include Level 2A and Level 2B assets detailed below, which may be included in the high-quality asset portfolio, provided they do not exceed 40% of the total high-quality asset portfolio after applying haircuts. Level 2B assets alone must not exceed 15% of the total high-quality asset portfolio.

.2.2.1 Level 2A Assets A varying haircut percentage is applied to the current market value of each Level 2A asset held, as follows: a- Marketable financial instruments representing claims on sovereigns, central banks, public sector entities, or multilateral development banks, or guaranteed by them, provided they meet the following conditions: Balances at the central bank include demand deposits, overnight deposits, and term deposits that: (1) mature within 30 days or are explicitly and contractually callable by the depositing bank, or (2) allow the bank to obtain financing on a term or overnight basis. Other term deposits at the central bank do not qualify as High-Quality Liquid Assets.

• They must be assigned a risk weight of 20% according to the Basel II standardized methodology for credit risk, and a 15% haircut is applied. If the risk weight is 50%, a 50% haircut is applied.
• They must exist in deep and developed markets, with the ability to conduct immediate sales or repurchase transactions, and exhibit low concentration levels.
• They have a proven track record as a reliable source of liquidity in markets (sales or repurchase) even during the stress period (for example, the maximum price decrease does not exceed 10%, or an increase in the haircut does not exceed 10% over a 30-day period similar to the liquidity stress period).
• They do not include obligations to a financial institution or any of its subsidiaries. b- Bonds issued by corporations and covered bonds, subject to a 15% haircut, provided they meet the following conditions:
• Unsecured bonds: Must not be issued by financial institutions or their subsidiaries.
• Covered bonds: Must not be issued by the bank itself or any of its subsidiaries.
• They must have a long-term credit rating from a recognized external rating agency of at least AA or equivalent. If not long-term, it is equivalent to a short-term rating equivalent to the long-term rating.
• They must exist in deep and developed markets, with the ability to conduct immediate sales or repurchase transactions, and exhibit low concentration levels.
• They have a proven track record as a reliable source of liquidity in markets (sales or repurchase) even during stressed market conditions (the maximum price decrease does not exceed 10%, or an increase in the haircut does not exceed 10 percentage points over a 30-day period similar to the liquidity stress period).

.2.2.2 Level 2B Assets These refer to other additional assets that may be included in Level 2 according to the Central Bank's estimation. Banks are expected to have appropriate systems and measures to monitor and control potential risks (such as credit and market risk) that the bank may be exposed to while holding these assets. A larger haircut is applied to the current market value of Level 2B assets held in the high-quality asset portfolio. The assets specified in Level 2B are as follows: a- Corporate debt instruments that meet all the following conditions (50% haircut):

• Must not be issued by financial institutions or their subsidiaries.
• Must have a long-term credit rating from a recognized external rating agency ranging from +A to -BBB, or equivalent short-term credit rating.
• They must exist in deep and developed markets, with the ability to conduct immediate sales or repurchase transactions, and exhibit low concentration levels.
• They have a proven track record as a reliable source of liquidity in markets (sales or repurchase) even during the stress period (the maximum price decrease does not exceed 20%, or an increase in the haircut does not exceed 20 percentage points over a 30-day period similar to the liquidity stress period). b- Ordinary shares that meet all the following conditions (50% haircut):
• Must not be issued by financial institutions or their subsidiaries.
• Must be a core part of a stock price index of the bank's country or the country where the shares are traded.
• The shares must be denominated in the bank's currency or the currency of the country where the shares are traded.
• They must exist in deep and developed markets, with the ability to conduct immediate sales or repurchase transactions, and exhibit low concentration levels.
• They have a proven track record as a reliable source of liquidity in markets (sales or repurchase) even during the stress period (the maximum price decrease does not exceed 40%, or an increase in the haircut does not exceed 40 percentage points over a 30-day period similar to the liquidity stress period).

.3 Adjustments to High-Quality Liquid Asset Levels Adjustments are made to asset levels (Level 1 and Level 2A/B assets) to calculate the maximum limits mentioned in paragraph 2 above (Level 2 assets not exceeding 40% of high-quality assets and Level 2B assets not exceeding 15% of high-quality assets), taking into account the impact of the value of secured financing (see Definition 10) and secured lending (see Definition 11) transactions on High-Quality Liquid Assets, as follows: a- Add Level 1/Level 2A/Level 2B assets lent or pledged as collateral for short-term secured financing/lending transactions (within 30 days) with the same haircut percentage according to the high-quality asset type. b- Deduct Level 1/Level 2A/Level 2B assets borrowed or held as collateral for short-term secured financing/lending transactions (within 30 days) with the same haircut percentage according to the high-quality asset type.

Chapter Four: Net Cash Outflows (Denominator of the Ratio) Net cash outflows represent the expected cumulative balance of cash outflows minus the expected cumulative balance of cash inflows under the specified adverse scenario over the relevant period (30 days). This result represents the liquidity buffer under the specified adverse scenario over the period in question. The expected cumulative balance of cash inflows is calculated by multiplying the expected amounts to be collected by the expected cash flow runoff rates under the specified adverse scenario, with a total coverage of up to 75% of the total expected cash outflows. If an asset is included as part of the High-Quality Liquid Assets (i.e., in the numerator), the related cash inflows are not calculated within the cash inflows (i.e., not part of the denominator). When an item is likely to be calculated in multiple categories of cash outflows, the bank must only calculate the maximum contractual cash outflow for that item.

.1 Cash Outflows .1.1 The expected cumulative balance of cash outflows is calculated by multiplying the existing balances of different liability categories by the assumed runoff rates expected to be withdrawn, and also by multiplying a specified amount expected to be withdrawn for off-balance sheet items. .1.2 Retail Deposit Runoff (Retail Deposits) Retail deposits are subject to the Liquidity Coverage Ratio and include demand deposits, savings deposits, and term deposits. Individual deposits are divided into "stable" and "less stable" with cash outflows applied at different rates for each category as follows: .1.2.1 Stable Deposits, subject to a 5% runoff rate, refer to the deposit amount insured in full by a deposit guarantee institution. The following applies: a- The depositor has other existing transactions with the bank and is expected to withdraw deposits in full, or b- The deposits are held in current accounts. If the bank cannot identify individual deposits classified as "stable" according to the above definition, the entire amount in the group must be subject to the less stable deposits in the following paragraph 1.2.2. .1.2.2 Less Stable Deposits a- Retail deposits that do not meet the conditions in paragraph 1.2.1 above are automatically included in this group, subject to a 10% runoff rate. b- Include uninsured deposits in full by the deposit guarantee institution or the issuer from high-net-worth individuals, or deposits that are quickly withdrawable. c- The maximum deposit amount for this group must not exceed $1 million or its equivalent in other currencies. d- Term retail deposits with maturity dates or notice periods for withdrawal exceeding 30 days are excluded from the total expected cash outflows, provided there is no contractual agreement allowing the depositor to withdraw the deposit within the 30 days related to the liquidity coverage standard, or in cases where significant penalties are applied for early withdrawal (meaning the penalty value is substantially greater than the interest due on the deposit), noting that the Central Bank may apply external runoff rates to those deposits in the future. .1.2.3 Retail deposits that do not meet either of the conditions in paragraphs (1.2.1 and 1.2.2) are subject to a 20% runoff rate. .1.3 Unsecured Deposits of Corporates and Funding (Not pledged to HQLA) For the purpose of calculating the Liquidity Coverage Ratio, unsecured deposits are defined as obligations arising from corporates (including legal entities such as sole proprietorships and partnerships) that are not legally secured by assets owned by the bank in case of bankruptcy, financial distress, or liquidation. This does not include obligations related to derivative contracts. All demand deposits and debt instruments maturing within 30 days or with contractual maturity dates within 30 days (such as term deposits and unsecured debt instruments), as well as obligations with unspecified maturity dates, must be calculated. Deposits with maturity dates exceeding 30 days and notice periods exceeding 30 days are not included in the liquidity coverage standard calculation. The classification of unsecured corporate deposits depends on the assumed sensitivity of the money lender to interest rates and the credit quality and financial solvency of the borrowing bank, which is determined based on the type of money provider and their level of complexity, as well as their operational relationships with the bank. Those deposits are classified as follows: .1.3.1 Unsecured deposits funded by small-sized institutions: These deposits are treated as retail deposits for implementation purposes, subject to a 5% haircut if they have the characteristics of stable deposits used in retail deposits, and 10% or 20% if less stable. This group consists of deposits arising from non-financial small enterprise customers managed by individuals and carrying operational risk characteristics similar to individual accounts, where the deposit size does not exceed $1 million or its equivalent in other currencies. The bank treats them in internal risk systems using the same method as retail deposits. In cases where part of the deposit can be withdrawn without causing a penalty, only that part is treated as a demand deposit. The remaining part is treated as a term deposit. .1.3.2 Operational deposits resulting from activities required by customers, whether financial or non-financial (conducted by the bank on behalf of customers) and cash management (services and products provided by the bank to customers to manage their cash flows, assets, and liabilities, to manage their operational activities): (Runoff rates of 25% apply). Runoff rates of 25% are applied only if the client has a substantive relationship with the bank and these funds are deposited for such activities. These activities must meet the following criteria:

• The client relies on the bank to perform these services through a third-party intermediary and independent agent to meet routine banking activities over the next 30 days.
• These services are provided under a legally binding agreement with clients.
• The termination of this agreement is subject to a notice period of at least 30 days or imposes costs on the depositor if operational deposits are withdrawn before the 30-day period. The bank must determine the methodology by which deposits subject to these activities are identified. If operational deposits related to the aforementioned activities are fully covered by the deposit guarantee institution, they are treated as stable individual deposits. This rate applies only to the portion of