4.2.16 Consolidation as Per LCR Approach

The approach to consolidation as per LCR approach followed by the application is detailed below:

1. Identification and Treatment of Unconsolidated Subsidiary

   The application assesses whether a subsidiary is a consolidated subsidiary or not by checking the regulatory entity indicator against each legal entity. The application consolidates the cash inflows and outflows of a subsidiary and computes the consolidated LCR, only if the subsidiary is a regulatory consolidated subsidiary. If the entity is an unconsolidated subsidiary, the cash inflows and outflows from the operations of such subsidiaries are ignored (unless otherwise specifically included in the denominator of LCR per regulations) and only the equity investment in such subsidiaries is considered as the bank’s asset and appropriately taken into the numerator or denominator based on the asset level classification.

   For instance, legal entity 1 has 3 subsidiaries, legal entity 2, legal entity 3 and legal entity 4. The regulatory consolidated flag for legal entity 4 is No. In such a case, legal entity 4 is treated as a third party for the purpose of consolidation and its assets and cash flows are completely excluded from calculations. Legal entity 1’s interest in legal entity 4 including common equity of legal entity 4 and assets and liabilities where legal entity 4 is the counterparty will not be eliminated as legal entity 4 is considered a third party during consolidation.

2. Updation of Asset Restriction Flag for Certain Assets

   The regulations states that if a level 2B asset eligible common equity is held by a consolidated subsidiary of a depository institution, the depository institution can include such an equity in its level 2B liquid assets only to the extent of the net cash outflows of that consolidated subsidiary. The application checks if a legal entity, included in the consolidated Run, is a consolidated subsidiary of a depository institution i.e. the depository institution flag of its parent is Yes, then common equities of such entities are restricted during consolidation. The application updates the asset restriction flag of level 2B common equities of such legal entities as restricted before starting the consolidation process.

3. Identification of and Consolidation by Subsidiary Type
   The process of consolidating HQLA as per US Federal Reserve differs slightly based on the type of subsidiary. Broadly 3 methods of consolidating HQLA are followed, based on the type of subsidiary, which is detailed below:

   1. In case of US Consolidated Subsidiaries Subject to LCR Requirements: In case of a US based legal entity that is a consolidated subsidiary of a covered company, consolidation is done as follows:
      • The application identifies whether the subsidiary is a US consolidated subsidiary.
      • If condition (a) is fulfilled, it identifies whether the US consolidated subsidiary is subject to LCR requirement that is, whether the subsidiary in question is a regulated entity.
      • If condition (b) is fulfilled, then it calculates the net cash outflow based on the US Federal Reserve LCR approach that is, based on the add-on approach calculation, eliminating inter-company transactions at the level of the consolidated subsidiary.
      • The application consolidates post-haircut restricted HQLA to the extent of the consolidated subsidiary’s net cash outflow that is, to the extent required to satisfy minimum LCR requirements of that subsidiary as part of the covered company’s HQLA.
      • It consolidates the entire amount of post-haircut unrestricted HQLA held at the consolidated subsidiary as part of the covered company’s HQLA.
      • It consolidates all cash inflows and outflows which are part of the net cash flow calculation.
   2. In case of US Consolidated Subsidiaries Not Subject to LCR Requirements
      • The application identifies whether the subsidiary is a US consolidated subsidiary.
      • If condition (a) is fulfilled, it identifies whether the US consolidated subsidiary is subject to minimum LCR requirement that is, whether the subsidiary in question is a regulated entity.
      • If condition (b) is not fulfilled, it eliminates all inter-company transactions till the level of the immediate parent of the consolidated subsidiary and then calculates the net cash outflow based on the modified LCR approach that is, based on cumulative net cash flows on the 30th day.
      • The application consolidates post-haircut restricted HQLA to the extent of the consolidated subsidiary’s net cash outflow and the entire amount of post-haircut unrestricted HQLA as part of the covered company’s HQLA.
      • It consolidates all cash inflows and outflows which are part of the net cash flow calculation.
   3. In case of Non-US Consolidated Subsidiaries
      • The application identifies whether the subsidiary is a US consolidated subsidiary.
      • If condition (a) is not fulfilled, it eliminates all inter-company transactions till the level of the immediate parent of the foreign subsidiary and then calculates the net cash outflow based on the modified LCR approach that is, based on cumulative net cash flows on the 30th day.
      • The application consolidates post-haircut restricted HQLA to the extent of the consolidated subsidiary’s net cash outflow and the entire amount of post-haircut unrestricted HQLA as part of the covered company’s HQLA.
      • It consolidates all cash inflows and outflows which are part of the net cash flow calculation.

Consolidation is done on a step by step basis based on each level of the organization structure starting from the most granular level. This means that intercompany transactions are eliminated at each sub-consolidation level till the final level of the consolidation (generally BHC) is reached. The Consolidated HQLA calculated at the level of the immediate subsidiary of the BHC is added to the HQLA held by the BHC. All intercompany cash flows are eliminated and the LCR is calculated in accordance with the LCR approach.

For instance a bank’s organization structure is as follows:

Figure 3-24 A Bank’s Organization Structure

In this case, at the first level of consolidation, calculation of net cash outflows and HQLA is done on a solo basis for legal entities 6, 7, 8, 9 and 10 as they do not have any subsidiaries. In case of regulated entities, intercompany transactions are not eliminated; whereas in case of non-regulated or foreign subsidiaries, intercompany transactions are eliminated to the next level of consolidation that is, legal entities 3 and 5. The restricted HQLA from entities 6 and 7 are consolidated to the extent of their net cash outflows, based on the respective approaches, while the unrestricted HQLA is transferred fully to legal entity 3. The cash inflows and outflows are consolidated to the full extent.

At the second level of consolidation that is, legal entity 3, intercompany transactions are eliminated till legal entity 1, if LE 3 is a non-regulated or foreign subsidiary. The HQLA is calculated as a sum of the consolidated restricted and unrestricted HQLA of entities 6 and 7 and the HQLA of legal entity 3. The net cash outflow is calculated based on the cash flows of entities 3, 6 and 7, post elimination of intercompany transactions if applicable. The consolidated HQLA is calculated based on the procedure detailed in the following section.

This process continues in a step-by-step manner till the bank holding company level.

Note:

• Stock of HQLA is calculated based on the US Federal Reserve LCR calculation approach for all subsidiaries. Only the approach to net cash outflow calculation changes based on the type of subsidiary as detailed earlier.
• The amount of HQLA that are consolidated is determined after applying the relevant haircuts that is; the post haircut value of HQLA is compared with the net cash outflow in order to estimate the consolidated HQLA.
• The restricted HQLA is consolidated based on the sequence of the quality of the asset that is, level 1 HQLA is consolidated first, followed by level 2A and 2B.
• In case of modified holding companies, the net cash outflow is calculated in accordance with the modified LCR approach that is, the 30-day scenario. All other calculations remain unchanged.

The table below provides a mapping of the consolidation approach followed by the application based on the type of subsidiary:

Table 3-6 Mapping of approach and intercompany transaction elimination level to each subsidiary type

NCOF Calculation Methodology for Highest US Parent i.e. BHC/IHC	Subsidiary Type	NCOF Calculation Methodology during Consolidation	Intercompany Transaction Elimination Level
LCR Approach	Regulated	LCR Approach	Up to the entity itself
	Non-Regulated	Modified LCR Approach	Up to the immediate parent
	Foreign	Modified LCR Approach	Up to the immediate parent
Modified LCR Approach	Regulated	Modified LCR Approach	Up to the entity itself
	Non-Regulated	Modified LCR Approach	Up to the immediate parent
	Foreign	Modified LCR Approach	Up to the immediate parent

Note:

• Regulated subsidiary is a consolidated subsidiary domiciled in USA that is expected to calculate LCR separately at its own level in addition to the LCR at BHC/IHC level.
• Non-regulated subsidiary is a consolidated subsidiary domiciled in USA that is not required to calculate LCR separately from the BHC/IHC.
• Foreign subsidiary is a consolidated subsidiary domiciled in a country other than USA.