RBI issues final guidelines on liquidity coverage ratio

The Reserve Bank today said the Basel III liquidity coverage ratio (LCR) will be introduced in a phased manner with a requirement of 60 per cent from January 2015.
The central bank today released the final Basel III framework on liquidity standards, which includes guidelines on liquidity coverage ratio (LCR), liquidity risk monitoring tools and LCR disclosure standards.
"The LCR requirement would be binding on banks from January 1, 2015. With a view to provide a transition time for banks, the requirement would be minimum 60 per cent for the calendar year 2015, with effect from January 1, 2015," the RBI said in a release.

The LCR promotes short-term resilience of banks to potential liquidity disruptions by ensuring that they have sufficient high quality liquid assets (HQLAs) to survive an acute stress scenario lasting for 30 days.
It could be noted that in the first bi-monthly monetary policy announced in April this year, the RBI had proposed to issue guidelines relating to Basel III LCR and liquidity risk monitoring tools by end-May 2014.
The RBI further said the LCR requirement would rise in equal steps to reach the minimum required level of 100 per cent on January 1, 2019.

"Banks should, however, strive to achieve a higher ratio than the minimum prescribed above as an effort towards better liquidity risk management," it added.

The central bank said that with effect from January 1, 2019, after the phase-in arrangements are complete, the LCR should be minimum 100 per cent on an ongoing basis because the stock of unencumbered high quality liquid assets (HQLA) is intended to serve as a defence against the potential onset of liquidity stress.
"During a period of financial stress, however, banks may use their stock of HQLA, and thereby falling below 100 per cent," it said.
Banks would be required to immediately report to the RBI for any such use of stock of HQLA along with reasons for such usage and corrective steps initiated to rectify the situation, it said.

The central bank also asked banks to disclose information on their LCR in their annual financial statements starting with the financial year ending March 31, 2015.