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  • The LCR Components and Operational Requirements

    • LM-11.2.1

      Bahraini conventional bank licensees must hold a stock of unencumbered HQLA to cover the total net cash outflows over a 30-day period under prescribed stress scenario outlined in the LCR requirements.

      August 2018

    • LM-11.2.2

      Assets qualify as HQLA if they can be easily and immediately converted into cash at little or no loss of value under stress circumstances.

      August 2018

    • LM-11.2.3

      Bahraini conventional bank licensees must ensure that no operational impediments exist that can prevent timely monetisation of HQLA during a stress period. Banks also have to demonstrate that they can immediately use the stock of HQLA as a source of available liquidity that can be converted into cash (either through outright sale or repo) to fill funding gaps between cash inflows and outflows at any time during stress periods.

      August 2018

    • LM-11.2.4

      The stock of HQLA must be well diversified within the asset classes themselves (except for sovereign debt of Bahrain, central bank reserves, central bank debt securities and cash). Bahraini conventional bank licensees must have policies and limits in place in order to avoid concentration with respect to asset types, issue and issuer types, and currency (consistent with the distribution of net cash outflows by currency) within asset classes.

      August 2018

    • LM-11.2.5

      Bahraini conventional bank licensees must ensure that they have internal policies and measures in place, in line with the following operational requirements:

      (a) Banks must periodically monetise a representative proportion of the assets in its stock of HQLA through outright sale or repos, in order to test access to the market, the effectiveness of its process of monetisation, and to minimise the risk of negative signalling during a period of actual stress;
      (b) All assets in the stock must be unencumbered, meaning free of legal, regulatory, contractual or other restrictions on the ability of the bank to liquidate, sell or transfer these assets;
      (c) Assets received in reverse repos and securities financing transactions that are held at the bank, which have not been rehypothecated, and which are legally available for the bank's use, can be considered as part of the stock of HQLA;
      (e) Assets which qualify for HQLA that have been deposited with the central bank but have not been used to generate liquidity may also be included in the stock of HQLA; and
      (f) A bank must exclude from the stock those assets that, although meeting with the definition of 'unencumbered', the bank would not have the operational capability to monetise them for whatever reasons;
      (g) The bank must have a policy in place that identifies legal entities, geographical locations, currencies and specific custodial or bank accounts where HQLA are held;
      (h) The bank must identify whether there are any regulatory, legal or accounting impediments to the transfer of these assets to the banking group level, and only include within its stock of HQLA the assets that are freely transferable;
      (i) The bank must exclude from the stock of HQLA, those assets where there are impediments to sale, such as large fire-sale discounts;
      (j) Banks must not include, in the stock of HQLA, any assets, or liquidity generated from assets, they have received under right of hypothecation, if the beneficial owner has the contractual right to withdraw those assets during the 30-day stress period;
      (k) Banks must include within the stock of HQLA the assets held during the reporting period, irrespective of the residual maturity of these assets. The two categories of assets that can be included in the stock of HQLA are 'Level 1' and 'Level 2'. Level 1 assets can be included without any limit, whereas Level 2 assets can only comprise up to 40 percent of total HQLA;
      (l) Level 2 assets are divided into two categories; level 2A and level 2B, according to the qualifying conditions identified in these requirements;
      (m) As part of level 2, banks may include level 2B assets up to 15 percent of total HQLA. However, level 2 assets must not exceed a cap of 40 percent of total HQLA assets;
      (n) The cap on level 2 and level 2B assets must be determined after the application of required haircuts and after taking into account the unwinding of short-term securities financing transactions maturing within 30 calendar days that involve the exchange of HQLA; and
      (o) Banks must ensure that they maintain appropriate systems and policies to control and monitor potential risks, such as market and credit risk which the banks may face while maintaining these assets.
      August 2018

    • LM-11.2.6

      The composition of HQLA is as follows:

      Level 1 Assets

      Level 1 assets comprise of an unlimited share of the total pool and are not subject to haircuts.

      Level 1 assets are limited to:

      (i) Coins and banknotes;
      (ii) Assets with central banks in countries in which the LCR is being calculated, including cash reserves, to the extent that the CBB allows banks to draw-down these assets in times of stress;
      (iii) Debt securities/Sukuk issued by Government of Bahrain or Gulf Cooperation Council (GCC) countries;
      (iv) Debt securities/Sukuk issued or guaranteed by sovereigns, central banks, PSEs, the International Monetary Fund ('IMF'), the Bank for International Settlements ('BIS'), the Islamic Development Bank ('IDB') or its subsidiaries, the European Central Bank ('ECB') and European Commission ('EC'), or Multilateral Development Banks ('MDB') satisfying the following conditions:
      a) Assigned a 0 percent risk weight as shown in Appendix A;
      b) Traded in large, deep and active repo or cash markets and characterized by a low level of concentration;
      c) Have a proven track record of reliable liquidity in the cash or repo market even during stressed market conditions;
      d) Not an obligation of a financial institution or any of its subsidiaries.
      (v) Where the sovereign has a non-0 percent risk weight, debt securities/Sukuk issued in domestic currency by the sovereign or central bank of the country in which the liquidity risk is being taken, or in the bank's home country; and
      (vi) Where the sovereign has a non-0 percent risk weight, debt securities/Sukuk in foreign currencies issued by the sovereign or central bank up to the amount of the bank's stressed net cash outflows in that specific foreign currency arising from the bank's operations in that jurisdiction.

      Level 2 Assets

      Level 2 assets are subject to a 40 percent cap of the overall stock of HQLA assets after haircuts have been applied.

      A. Level 2A assets

      A 15 % haircut is applied to the current market value of each level 2A asset held in the stock of HQLA.

      Level 2A assets are limited to the following;
      (i) Debt securities/Sukuk issued or guaranteed by sovereigns, central banks, PSEs or multilateral development banks that satisfy all the following conditions:
      a. Assigned a 20 percent risk weight, as per Appendix A;
      b. Traded in large deep and active repo or cash markets and characterised by low level of concentration;
      c. Have a proven track record of reliable source of liquidity in the markets (sale or repo) even during stressed market conditions (i.e. maximum price decline not exceeding 10 percent or the increase in haircut not exceeding 10 percent over a 30-day period during a relevant significant stress period); and
      d. Not an obligation of a financial institution, or any of its affiliated entities.
      (ii) Debt securities (including commercial paper)/Sukuk that can be monetised, and covered bonds that satisfy all of the following conditions:
      a. Not issued by a financial institution or any of its affiliated entities;
      b. In the case of covered bonds, not issued by the bank itself or any of its affiliated entities;
      c. Either have a long-term credit rating from a recognized external credit assessment institution ('ECAI') of at least AA-or, in the absence of a long term rating, a short-term rating equivalent in quality to the long-term rating;
      d. Traded in large, deep and active cash or repo markets and characterized by a low level of concentration; and
      e. Have a proven track record of reliable liquidity in the markets, even during stressed market conditions (i.e. maximum price decline not exceeding 10 percent, or the increase in haircut not exceeding 10 percent over a 30-day period during a relevant period of significant liquidity stress).
      B. Level 2B assets

      Level 2B assets are limited to the following;
      (i) Debt securities (including commercial paper)/Sukuk issued by non-financial institutions, subject to a 50 percent haircut, that satisfy all of the following conditions:
      a. Debt securities/Sukuk issued by non-financial institutions, or one of their subsidiaries, and have a long-term credit rating between A+ and BBB- or equivalent, or in the absence of a long-term rating, a short-term rating equivalent to the long-term rating;
      b. Traded in large deep and active repo, or cash markets characterized by a low level of concentration; and
      c. Have a proven track record as a reliable source of liquidity in the markets even during stressed market conditions (i.e. maximum price decline not exceeding 20 percent. or the increase in haircut not exceeding 20 percent over a 30-day period during a relevant period of significant liquidity stress);
      (ii) Common equity shares subject to a 50 percent haircut that satisfy all of the following conditions:
      a. Not issued by a financial institution or any of its affiliated entities;
      b. Exchange traded and centrally cleared;
      c. A constituent of the major stock index in the home jurisdiction or where the liquidity risk is being taken;
      d. Denominated in BHD, USD or in the currency of the jurisdiction where the liquidity risk is being taken;
      e. Traded in large, deep and active repo or cash markets characterized by a low level of concentration; and
      f. Have a proven track record as a reliable source of liquidity in the markets, even during stressed market conditions (i.e. maximum price decline of not exceeding 40 percent, or increase in haircut not exceeding 40 percent over a 30-day period during a relevant period of significant liquidity stress).

      Appendix A provides the calculation of the caps and haircuts.

      August 2018

    • LM-11.2.7

      If a bank wishes to include other assets under level 2B assets, prior approval must be obtained from the CBB.

      August 2018

    • LM-11.2.8

      Bahraini conventional bank licensees must demonstrate their ability to monitor the concentration of the assets in their stock of HQLA, and they must have adequate policies in place for monitoring asset concentration and granular distribution.

      August 2018