Risk Management in Banks
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BASELIII
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- LCR Formula
- NSFR Formula
3. Leverage Ratio: Basel III’s “leverage ratio” is calculated by comparing Tier 1
capital with “total exposure,” without reference to RWAs. The overall target is a leverage ratio of at least 3 percent (i.e., Tier 1 capital should be at least three percent of total exposure). The Liquidity Coverage Ratio (LCR) is designed to ensure that an internationally active bank has sufficient unencumbered, high- quality liquid assets to offset the net cash outflows it could encounter under a month long acute stress scenario that includes both systemic and institution- specific shocks. The LCR requires that a bank’s stock of high- quality liquid assets be at least equal to its total net cash outflows for the next 30 days, which is defined as the total expected cash outflows minus the total expected cash inflows in the stress scenario, up to a cap of 75 percent of expected outflows.
Stock of high-quality liquid assets ------------------------------------------------------------------- ≥ 100% Total net cash outflows over the next 30 calendar days
The Net Stable Funding Ratio (NSFR) seeks to promote medium- and long-term funding by establishing minimum amounts of liquidity based on a bank’s assets and activities, including those related to off-balance sheet (OBS) commitments— over a one-year period of extended stress. The NSFR requires that Available Stable Funding (ASF) exceed required Stable Funding (RSF) for assets and OBS exposures.
Available amount of stable funding --------------------------------------------- ≥ 100% Required amount of stable funding
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