4 Liquidity Coverage Ratio Calculation

US Federal Reserve issued a notice of final rule, Liquidity Coverage Ratio: Liquidity Risk Measurement, Standards, and Monitoring, in November 2013 covering the requirements for the computation of Liquidity Coverage Ratio for US covered companies. These guidelines are along the lines of those issued by BIS, with some deviations based on the conditions under which US banks operate. US Federal Reserve has prescribed two approaches for computing the Liquidity Coverage Ratio, each of which is applicable to banks of different sizes.

OFS Liquidity Coverage Ratio is updated to comply with WW, Final Rule, and Liquidity Coverage Ratio: Liquidity Risk Measurement Standards, Sep 2014.

• Liquidity Coverage Ratio

  The Liquidity Coverage Ratio is applicable to larger banks and requires the stock of HQLA to be sufficient to cover add-on approach over a liquidity horizon of 30 days. The regulator provides specific guidelines on the inclusion of assets into the stock of HQLA and provides the relevant haircuts. The computation of the denominator is based on an add-on approach based on inflow and outflow rates specified by the regulator.

• Modified Liquidity Coverage Ratio

  A new approach, the modified LCR calculation, is prescribed by US Federal Reserve for smaller banks, which requires the stock of HQLA to be sufficient to cover net cash outflows over a liquidity horizon of 30 days. These banks are required to compute a less stringent LCR, because of their relatively small size and lower complexity. The inflow and outflow rates for such banks are 70% of those prescribed under the LCR approach.

OFS LRM supports both these approaches for computing Liquidity Coverage Ratio as prescribed by the US Federal Reserve in its final rule as per Regulation WW, Liquidity Coverage Ratio: Liquidity Risk Measurement, Standards, and Monitoring.