Incident Command System Essay Example

BASEL III LIQUIDITY INITIATIVE.

INTRODUCTION.

The Basel III was brought in by the Basel committee with the aim of improving world wide liquidity and capital guideline for it to better banking sector ability to take in economic and financial stress that emanated from the changes arising from the financial market and banking system in any given economy.

The reforms were made by the committee in response to the need that the banking sector had problems in managing their liquidity even when they had adequate capital and in this connection it drew their attention on how to guide on the proper functioning of the banking sector and the financial markets. Through their analysis they came up with the sound management and supervision as their recommendation to gap the problem and smoothen the proper functioning of the capital and liquidity. It had the following roles:

  1. To guide on how to manage liquidity in the banking sector though development of a well define liquidity framework that work well with the banking sector.

  2. Guidance on how to enhance proper risk management in vital area i.e. those area that give rise to their failure can lead to failure of the whole banking system or area which acts as the catalyst to the problems that are already in the sector.

The committee came up with liquidity requirement. These are liquidity coverage ratio (LCR) and Net stable funding ratio (NSFR).

LIQUIDITY COVERAGE RATIO.

This standard was developed in order to help the bank survive a 30 calendar day of liquidity stress using the fund invested in high-quality liquid asset that can be liquated to meet the requirements of the bank in that 30 days stress after which it is assumed that within that period things will be normal due to corrective mechanism are but in place to normalize the condition of the banking sector.

HOW TO CALCULATE LCR

The liquidity coverage ratio is determined by two variables: Amount of stock of high-quality liquid assets and the total cash outflow projected for the period of 30 days.

That is,
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This helps to in ensuring that in any given time the outflow requirement is not grater than the available liquid assets.

HIGH-QUALITY LIQUID ASSETS (HQLAS).

These are the highly liquid asset that its liquidity is not affected by the market stress for example inflation. It has ability to maintain its stability they include secured borrowing or sales. They can be easily identified by the following characteristics:

  1. They have few related characteristics with risky assets in the market.

  2. They are traded on stable and recognized exchange market for example international exchange market.

  3. They should be lowly concentrated in the market that is the market should be diverse securities traded in order to reduce number of the same kind.

  4. The asset is actively repurchased in the exchange market.

  5. They are constantly quoted in the stock market thus reliable and can be sold when needed.

LEVEL 1 ASSETS.

These are high-quality asset which the total amount is included in the calculation of the liquid coverage ratio. It comprises of a pool of unlimited shares. Sometime its unlimited aspect is regulated by the national supervisor and it may limit it basin on; cash available, amount in central bank as there reserve can be considered too and marketable securities assigned zero percent risk-weigh and actively traded for in large amount.

LEVEL 2 ASSETS.

These are high-quality asset which amount include in calculation of LCR is limited to 40% of the overall stock after haircut or two-third of the total amount of it kind. This includes swaps and secured short term securities or collaterals for example they can mature within 30 days.

ASSET THAT QUALIFY HQLAS IN AUSTRALIA.

For an asset to be recognized as level 2 high-quality liquid it must fulfill the following conditions:

In the case of marketable securities it should;

  1. It should have a provision of 20% risk-weigh as per the standard laid down by Basel III on credit management.

  2. It should not be on contract with of any financial institution for example held has security of a loan.

  3. It should be evident that is reliable source of liquidity in the period of stress.

In the case of corporate bonds it must:

  1. It should be issued by any other entity other financial institution or affiliate institution to any financial institution.

  2. It should have broad and deep market for it to be considered reliable when needed.

30 DAY REQUIREMENT.

The 30 day requirement is determined by the central bank. It is the maturity period of the government Treasury bill.

Its calculation requires the risk free rate and beta factor which is made up all those factors that affects economy such as inflation.

When HQLAs is not enough in the bank, it is required not to hold any asset as a liquid in the liquid stock for a period of 30 days from the day of realization of the deficit. For it to accumulate required HQLAs.

To avoid this in future the bank should constantly monitor its high-quality liquid asset in relation to the outflows and considered investing on government bonds since they are they are of long duration and can be reconverted any time it is needed two and also have interest-risk rate too.

HOW TO CALCULATE NET STABLE FUNDING RATIO

Net funding ratio is calculated using two variables. That is, amount available for stable funding and amount required for stable funding.

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The ratio should be more than 100% for Net stable funding ratio to be considered viable.

NET STABLE FUNDING RATIO LIQUIDITY INITIATIVE.

Net stable funding ratio is a liquidity initiative this is evident in its purpose that is ensuring that long term asset are funded with stable level of risk, thus the liquidity initiative is brought about by the fact that any careless choice of a unpredictable risky liability to fund a long-term assets may cripple the bank, also the liquidity initiative comes in from its components characteristics for example, available stable funding comprises of preferred stock which has fixed charges and failure to meet the obligation can cause auctioning of the security used thus interfering with the liquidity of the bank, it also include any long-term liability for example loan that need to be repaid within a period of more than one year. This greatly affects the liquidity of the bank and Net stable funding ratio is trying to control this.

REFERENCE.

Basel committee on banking supervision. (December 2010). Basel III: international frame work for liquidity risk measurement, standard and monitoring. Available at >http://www.bis.org/publ/bcbs238.pdf