8.2.2.2 Valuation Changes

This is based on the assumption that a bank would require posting additional collateral because of a decrease in the value of current assets.

This assumption impacts the numerator of LCR that is; it results in a decrease in the stock of HQLA.

In this assumption, the additional collateral posted will result in the selected assets being marked as encumbered. The relevant amount is deducted from the stock of high quality liquid assets where applicable. These assets will not be available for the purpose of counterbalancing or for estimating the cash inflows for LCR.

This assumption supports changes in the value of the collateral posted due to changes in market valuation of transaction or changes in the contract value. This further leads to cash outflow.

This assumption impacts the denominator of LCR that is, increase in the outflow for the Legal Entity.

Some derivatives are secured by collateral to cover losses arising from changes in mark-to-market valuations. For changes in the value of the derivative, additional collateral is posted resulting in a cash outflow. The valuation changes can be with Natural currency or Selected Currency. Valuation changes can be specified in Amount or Percentage. Here, both ratings and notches downgrade are not applicable.

The time buckets selected as part of the assumption parameters are the impacted time buckets.

Note:

The assumption specification and computation method for this sub category corresponds to that available as part of the Additional Collateral - Valuation Changes – Asset Value Decrease assumption type. This assumption is renamed as Valuation Changes in this version.

See Defining a New Business Assumption, for information on the steps involved in specifying this assumption.

The steps involved in applying the delay in cash flow timing assumption to cash flows are as follows:

  1. Identify the original time bucket and calculate the cash outflow occurring in it due to the assumption.
  2. Identify the corresponding revised time buckets and the cash inflow occurring in it, including penalties, if any.
  3. If time specific or critical obligation, record the delay and indicate a breach.

    Following is an example:

    Table 7-12 Defining assignment method

    Based On Assumption Unit Assignment Method
    Market Value Percentage Selected

    Table 7-13 Details of valuation change

    Legal Entity Product Valuation Change Impact
    LE 1 P4 100%
    LE 2 P5 50%
    LE 3 P4 20%
    LE 4 P5 30%

    Table 7-14 Encumbrance – Valuation Changes

    Legal Entity Product Type Original Market Value Revised Market Value
    LE 1 P4 520000 0 [=520000-(100% * 520000)]
    LE 2 P5 610000 305000 [610000- (50%*610000)]
    LE 3 P4 160000 128000 [160000-(20% * 160000)]
    LE 4 P5 120000 84000 [120000-(30% * 120000)]