Main Note - [Basel III Pillars](Basel%20III%20Pillars.md) 1. [April 17, 2020](https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11870&Mode=0) - The Reserve Bank of India issued a notification to review the maintenance of Liquidity Coverage Ratio (LCR), a key part of Basel III Framework on Liquidity Standards. 2. The two parts of this notification are: 1. Revised LCR requirement 2. Allowing banks to consider entire pool of SLR assets for HQLAs ### Revised LCR requirement | Period | LCR Requirement | | :----------------------------------- | :-------------- | | April 17, 2020 to September 30, 2020 | 80% | | Oct 1, 2020 to March 31, 2021 | 90% | | April 1, 2021 onwards | 100% | The Basel III reforms on LCR, issued in January 2013, required banks to maintain LCR equal to 100% from January 1, 2019\. However, based on evolving liquidity conditions due to Covid-19 pandemic, RBI felt that there was a need to ease pressure on the cash position of banks. Currently (before this notification), LCR $=$ $\dfrac{\text{Stock of HQLAs}}{\text{Total net cash outflows over the next 30 calendar days}}$ ≥ 100% Thus, LCR requires banks to hold “high quality liquid assets” assets to cover expected outgo over 30 days. ### Entire pool of SLR assets for HQLAs 1. The notification allowing banks to include the entire pool of [SLR](SLR%20-%20Statutory%20Liquidity%20Ratio.md) assets for HQLAs. 2. HQLAs are divided into levels \- Level 1, Level 2A, Level 2B. 3. What is [SLR - Statutory Liquidity Ratio](SLR%20-%20Statutory%20Liquidity%20Ratio.md)? 1. Banks are required to maintain, with RBI, **18%** of their [Net Time and Demand Liabilities (NDTL)](Cash%20Reserve%20Ratio%20(CRR).md#^213) in the form of liquid assets for every fortnight. These assets are called Statutory Liquidity Ratio or SLR assets, most of which are in the form of government securities. 2. The ratio was decreased from 18.5 % to 18% on April 11, 2020\. 4. For Level 1 assets, RBI as of now allows: 1. Cash in excess of minimum [Cash Reserve Ratio (CRR)](Cash%20Reserve%20Ratio%20(CRR).md), 2. Marketable securities issued by foreign governments, 3. Govt securities only in excess of [SLR - Statutory Liquidity Ratio](SLR%20-%20Statutory%20Liquidity%20Ratio.md) 4. And within SLR, 1. Government securities up to the extent allowed by RBI to avail [Marginal Standing Facility (MSF)](Marginal%20Standing%20Facility%20(MSF)) facility. 1. RBI, as of now, allows banks to borrow up to **3%** of their NDTL against SLR assets itself as collaterals, under MSF facility. 2. The limit was increased from 2% to 3% on March 27, 2020. 2. Government securities allowed under the facility to avail Liquidity for Liquidity Coverage Ratio (FALLCR). 1. RBI, as of now, allows banks in “stressed times” to borrow under this facility upto to **15%** of their NDTL against SLR assets itself as collaterals, to maintain LCR. 2. The limit was increased from 14.5% to 15% on April 1, 2020. 5. Before the changes to the above three ratios, only 2% $+$ 14% $=$ 16% of NDTL was allowed as HQLAs whereas SLR was 18.5% of NDTL. 6. Now, 3% $+$ 15% $=$ 18% of NDTL is allowed as HQLAs whereas SLR is also 18% of NDTL. <span style="color:#C21E56;">Effectively, RBI has now allowed the entire pool of SLR assets to be included in HQLAs to meet LCR.</span> ### Why did RBI reduce LCR? 1. In times of liquidity stress, the market for lower grade assets are the ones that “dry up” very fast. This illiquidity in the broader market becomes a source of discomfort for the central bank. Thus, RBI decided to reduce LCR, which will free up high quality assets of banks, and also let banks use cash to go after “lower quality” assets and lend more. 2. A reduction in LCR, thus leads to flow of cash into these assets, increasing supply of money into the economy. 3. Lower LCR also helps banks to reduce its cost of holding HQLAs at a time when HQLAs see a good demand and trade at a high premium. Banks can sell these assets at premium and convert MTM returns to actual profits. ## Related Notes 1. [Basel III Pillars](Basel%20III%20Pillars.md) 2. [Basel III Pillar 3](Basel%20III%20Pillar%203.md) 3. [Classification, Valuation and Operation of Investment Portfolio of Commercial Banks](Classification,%20Valuation%20and%20Operation%20of%20Investment%20Portfolio%20of%20Commercial%20Banks.md) 4. [Department of Regulation (DoR)](Department%20of%20Regulation%20(DoR).md)