Liquidity Stress, HQLA Caps and Contingency Funding
A bank reports an LCR of 118% and NSFR of 104%. HQLA is RM3.2 billion: RM1.1 billion Level 1, RM1.4 billion Level 2A and RM0.7 billion Level 2B. Retail deposits are RM8 billion; corporate deposits RM4 billion, including RM2.1 billion from five government-linked companies. In a 30-day stress, retail outflows are 8%, non-GLC corporate outflows 30%, GLC outflows 45%, and committed facility drawdowns RM600 million. Haircuts are 15% for Level 2A and 30% for Level 2B. The bank assumes no inflows and no central bank liquidity support. The treasurer proposes buying RM500 million more Level 2B bonds to raise the LCR. The ALCO asks whether this is prudent and what contingency funding plan triggers should be activated.
1. Compute the stressed LCR, including HQLA caps, and interpret the result.
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First adjust HQLA for haircuts: Level 2A RM1.4bn x 85% = RM1.19bn; Level 2B RM0.7bn x 70% = RM0.49bn. Unadjusted eligible total = RM1.1 + 1.19 + 0.49 = RM2.78bn. But Level 2 assets are capped at 40% of HQLA. With Level 1 of RM1.1bn, maximum HQLA = RM1.1bn / 0.6 = RM1.833bn. The Level 2B cap of 15% of HQLA is also binding: 15% x 1.833 = RM0.275bn. So eligible HQLA is about RM1.833bn, not RM2.78bn. Stressed outflows: retail 8% x 8 = 0.64; non-GLC corporate 30% x 1.9 = 0.57; GLC 45% x 2.1 = 0.945; drawdowns 0.6; total = 2.755. Stressed LCR = 1.833 / 2.755 = 66.5%. Even with some inflows, it would likely be below 100%. The starting 118% LCR masks HQLA composition and deposit concentration risk.
2. Evaluate the treasurer's proposal to buy RM500 million more Level 2B bonds.
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Buying RM500m more Level 2B is not prudent. Because Level 2 assets already exceed the 40% cap and Level 2B exceeds the 15% cap, additional Level 2B would not increase eligible HQLA; it would only increase encumbrance, market risk and wrong-way risk. The treasurer is optimizing the reported ratio optically, not the stressed ratio. A better action is to increase Level 1 HQLA, diversify the deposit base away from five GLCs, extend wholesale funding, and pre-position collateral for central bank facilities. The bank should also test a scenario where GLC deposits leave faster than 45%. The ALCO should reject the proposal unless it is part of a broader plan that first fixes the HQLA cap and concentration issues.
3. Recommend contingency funding plan triggers and actions for the ALCO and Board.
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CFP triggers should include LCR below 110% for five business days; stressed LCR below 100%; GLC deposit outflow above 20% in a week; inability to roll wholesale funding; a rating downgrade; and a market-wide disruption. Actions should include activating the CFP committee, drawing committed lines, selling liquid assets, using repo, slowing lending growth, and communicating with BNM. The Board should approve recovery options that do not rely on more Level 2B. The ALCO should report the stressed LCR and HQLA cap usage monthly, not just the headline LCR, so that the Board sees the composition risk before a stress event.