Liquidity and Asset-Liability Management
Liquidity and Asset-Liability Management
This domain tests the two Basel liquidity ratios and the ALM toolkit: repricing gaps, duration, NII and EVE sensitivity, and funding concentration. Expect a numeric LCR with haircuts and caps applied, plus a conceptual ALM question on behavioural assumptions.
LCR and NSFR
LCR = unencumbered HQLA divided by net cash outflows over 30 days, minimum 100%. HQLA haircuts: Level 1 (cash, central bank reserves, high-quality sovereigns) 0%; Level 2A 15%; Level 2B 25-50%. Caps: Level 2 no more than 40% of HQLA, Level 2B no more than 15%. Inflows are capped at 75% of outflows. NSFR = available stable funding divided by required stable funding, minimum 100% over a one-year horizon.
ALM
Repricing gap = rate-sensitive assets minus liabilities in a bucket; a positive gap gains when rates rise. Duration gap measures equity sensitivity. EVE captures the present value of all cash flows under a rate shock; NII sensitivity captures 12-month earnings. Behavioural assumptions - non-maturity deposit stickiness, prepayment speeds, pipeline pull-through - drive both and are a supervisory focus under IRRBB.
Worked example
HQLA: Level 1 $180m; Level 2A $40m less a 15% haircut = $34m; Level 2B $30m less a 50% haircut = $15m. Total $229m. Cap check: Level 2 is $49m, 21.4% of $229m, under 40%; Level 2B is 6.6%, under 15%, so no cap binds. Outflows $200m, inflows $60m - below the 75% cap of $150m, so counted in full. Net outflows $140m. LCR = 229 / 140 = 164%. Had Level 2A been $200m, the 40% cap would have removed the excess from HQLA before the ratio was struck.
Traps
- Applying the 40% cap before haircuts, or omitting haircuts altogether.
- Counting inflows above the 75% cap.
- Including encumbered assets, or central bank borrowing capacity, inside HQLA.
- Confusing a positive repricing gap (benefits from rising rates) with a positive duration gap.
- Treating NSFR as a 30-day measure, or the LCR as a one-year measure.