4.3.16 Calculating Net Cash Outflows
The Net Cash Outflows are computed after applying the scenario specified by the user, as a set of business assumptions, to the contractual cash flows. The process of computing the net cash outflows is as follows:
- Calculating Total Cash Inflows
The application applies the business assumptions, specified on products involving cash inflows, selected as part of the Run. The regulatory assumptions specified in the Regulations Addressed through Business Assumptions section are predefined and packaged as part of the out-of-the-box Run to determine the inflows over the liquidity horizon. The business assumption adjusted cash inflows occurring over the liquidity horizon are summed up to obtain the total cash inflow. These include inflows from earning assets such as loans, assets that are not eligible for inclusion in the stock of HQLA, derivatives inflows, and so on.
- Calculating Total Cash Outflows
The application applies the business assumptions, specified on products involving cash outflows, selected as part of the Run. The regulatory assumptions specified in the Regulations Addressed through Business Assumptions section are predefined and packaged as part of the out-of-the-box Run to determine the outflows over the liquidity horizon. The business assumption adjusted cash outflows occurring over the liquidity horizon is summed up to obtain the total cash outflow. These include outflows from liabilities, derivatives outflows, outflows due to changes in financial conditions such as rating downgrade and valuation changes, and so on.
- Calculating Net Cash Outflow
The total net cash outflows are defined as the total expected cash outflows minus total expected cash inflows for the LCR horizon, for example, the subsequent 30 calendar days. Total expected cash outflows are calculated by multiplying the outstanding balances of various categories or types of liabilities and off-balance sheet commitments by the rates at which they are expected to run off or be drawn down. Total expected cash inflows are calculated by multiplying the outstanding balances of various categories of contractual receivables by the rates at which they are expected to flow in up to an aggregate cap of 75% of total expected cash outflows. This requires that a bank must maintain a minimum amount of stock of HQLA equal to 25% of the total cash outflows.
Net Cash Outflow is computed as follows:
Figure 3-31 Net Cash Outflow
Banks will not be permitted to double count items. For example, if an asset is included as part of the “stock of HQLA” (like the numerator), the associated cash inflows cannot also be counted as cash inflows (part of the denominator). Where an item could be counted in multiple outflow categories, (such as, committed liquidity facilities granted to cover debt maturing within the 30 calendar day period), a bank should assume only up to the maximum contractual outflow for that product.
Note:
The inflow and outflow rates as prescribed by HKMA for computing LCR are within the application and ready to be used. Users are also allowed to define bank-specific inflow and outflow rates and apply them to the contractual cash flows to view the stock of HQLA, net cash outflows, and LCR across multiple scenarios.