7.1.2.2 Ratings Downgrade

Some financing transactions or derivatives with embedded downgrade triggers, downgrade a bank’s rating by a recognized credit rating institution, requiring the bank to post additional collateral. This assumption impacts the numerator of LCR that is, a decrease in the market value of HQLA.

For some financing transactions or derivatives with embedded downgrade triggers, downgrade in a bank’s rating by a recognized credit rating institution will require the bank to post additional collateral. The encumbrance assumption category assumes that the asset required to be posted as additional collateral is already available with the bank and will be encumbered. This results in the deduction of the relevant amount from the stock of high quality liquid assets as it is now no longer unencumbered.

Note:

The assumption specification and computation method for thi subcategory correspond to that available as part of the Addition Collateral - Rating Downgrade Decrease in Asset assumption type. This assumption is renamed as Ratings Downgrade in this version.

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

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

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. New Stock of HQLA assignment is done in the following manner:

   Figure 7-8 Formula for new stock of HQLA assignment

   
   

   

   
   

   Assuming a downgrade trigger of 3-Notches, this assumption is specified as follows:

   Table 7-11 Encumbrance - Ratings Downgrade

   Business Assumption Definition		Cash Flow Assignment
   Asset Level	Downgrade Impact Value	Downgrade Impact Amount	Downgrade	Decrease in HQLA
   Level 1 Asset	80%	11000	1 Notch	8800 [= (11000*80%)]
   Level 1 Asset	100%	9000	2 Notches	9000 [= (9000*100%)]
   Level 1 Asset	80%	80000	3 Notches	64000 [= (80000*80%)]