The Liquidity Coverage Ratio (“LCR”) was introduced with the implementation of Basel III. The Basel Committee published the framework (PDF 345KB) initially in December 2010 and subsequently a revised version was issued in June 2011. The South African Reserve Bank (“SARB”) implemented the Basel III regulations from December 2012.
The LCR was developed to promote the short-term resilience of a bank’s liquidity risk profile. The LCR aims to ensure that the bank continuously maintains an adequate level of unencumbered level one and level two high-quality liquid assets that either consists of cash or can be converted into cash (with limited loss of value) to meet the bank’s liquidity needs over a 30 calendar day time horizon under a significantly severe liquidity stress scenario.
Banks are required to hold a stock of unencumbered high quality liquid assets (HQLA). The required ratio is that a least 60% of the bank’s portfolio of qualifying high-quality liquid assets must consists of level one high-quality liquid assets. The bank’s portfolio of qualifying high-quality liquid assets may consist of between 60% and 100% of level one high-quality liquid assets, but level two high quality liquid assets shall in no case exceed 40% of the bank’s aggregate portfolio of level one and level two high-quality liquid assets.
In March 2013 the SARB issued a directive, stating that banks should adhere to the revised framework issued by the Basel Committee until the SARB has updated the regulations. To date the regulations have not been updated. Reporting of the LCR occurs daily via the BA 325 return (market risk return).
KPMG have extensive experience in LCR, and factual findings reporting on the LCR.
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