ALM Committee: LCR Breach After a Committed Line Drawdown
Zenith Bank’s ALM committee meets after a rating downgrade of a large corporate depositor. NDTL is ₹9,200 crore. HQLA comprises Level 1 assets of ₹540 crore and eligible Level 2A assets of ₹90 crore after haircuts; 30-day net cash outflows are estimated at ₹560 crore. The bank’s internal LCR floor is 110%, although the regulatory minimum is 100%. Treasury reports that a ₹400 crore wholesale deposit matures in 12 days and a ₹250 crore committed line to an infrastructure client is likely to be drawn. If drawn, stress outflows rise by ₹80 crore. Management is considering (a) buying ₹120 crore of 10-year G-secs with short-term wholesale borrowing, (b) prepaying the maturing wholesale deposit from HQLA, or (c) doing nothing and relying on the internal floor. The bank also has ₹150 crore of unencumbered corporate bonds eligible as Level 2B.
1. Calculate the current LCR and the LCR immediately after the committed line is drawn. Does the bank meet the regulatory and internal floors? What HQLA gap must be closed to restore the internal floor?
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Eligible HQLA = Level 1 ₹540 crore + Level 2A ₹90 crore = ₹630 crore. Level 2B is not counted unless it is eligible and within the prescribed cap, so it is excluded here.
Current LCR = 630 / 560 = 112.5%. This meets both the 100% regulatory minimum and the 110% internal floor.
After the committed line is drawn, net cash outflows = 560 + 80 = ₹640 crore. Post-drawdown LCR = 630 / 640 = 98.4%. The bank is below both floors.
To restore 110% with ₹640 crore of outflows, required HQLA = 640 × 1.10 = ₹704 crore. HQLA gap = 704 − 630 = ₹74 crore. To restore only the 100% regulatory minimum, required HQLA is ₹640 crore, so the minimum gap is ₹10 crore. The committee should focus on the internal gap of ₹74 crore, not just the regulatory gap.
2. Evaluate the three options. Which should the ALM committee choose and why? Consider LCR effect, interest-rate risk and funding stability.
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Option (a) - buying ₹120 crore of 10-year G-secs with short-term wholesale borrowing - may not improve LCR at all. If the borrowing matures within 30 days, HQLA rises by ₹120 crore but outflows also rise by about ₹120 crore, leaving the ratio broadly unchanged; it also adds duration and interest-rate risk and creates rollover risk. If the borrowing is longer than 30 days, LCR improves, but the bank becomes more reliant on wholesale funding.
Option (b) - prepaying the ₹400 crore deposit from HQLA - is counterproductive. HQLA falls to 230 crore and outflows fall to 240 crore after the drawdown, giving an LCR of 230 / 240 = 95.8%, worse than doing nothing. Prepayment also uses HQLA that may be needed for the committed line.
Option (c) - doing nothing - leaves LCR at 98.4%, a breach of both floors.
Recommendation: do not prepay the deposit. First activate contingency funding, reduce or redirect the committed-line drawdown, and use eligible Level 2B only within the cap. Arrange funding with maturity outside the 30-day window to buy genuine HQLA, enough to reach ₹704 crore. Short-term borrowing to buy long G-secs should be treated as a stopgap, not a solution, because it can create regulatory-arbitrage and rollover risk.