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  • LM-11.3 LM-11.3 Cash Outflows

    • LM-11.3.1

      Net cash outflow is defined as the total expected cash outflows, minus total expected cash inflows in the stress scenario for the subsequent 30 calendar days. Total expected cash outflows are calculated by multiplying the outstanding balances of various categories or types of liabilities and OBS commitments with the run-off rates, as shown in these requirements. Total expected cash inflows are calculated by multiplying the outstanding balances of various categories of contractual receivables by the rates at which they are expected to flow in, up to an aggregate cap of 75 percent of total expected cash outflows. (See Appendix A)

      August 2018

    • LM-11.3.2

      If an asset is included as part of the stock of HQLA (i.e. the numerator), the associated cash inflows cannot also be counted as cash inflows (i.e. the denominator).

      August 2018

    • Outflows

      • LM-11.3.3

        Retail deposits are defined as deposits placed with a bank by a natural person. Deposits from legal entities, sole proprietorships or partnerships are captured in wholesale deposit categories. Retail deposits include demand deposits, saving accounts and term deposits.

        August 2018

      • LM-11.3.4

        Retail deposits are divided into 'stable' and 'less stable' categories as described below:

        A. Stable Deposits

        Stable deposits are subject to a run-off rate of 3%. Stable deposits must meet the following conditions:
        i. Fully insured6 under a deposit insurance scheme; and
        ii. Meets either of the following 2 conditions (a) or (b):
        a) The depositors have other established relationships with the bank that make deposit withdrawal highly unlikely. An established relationship is deemed to exist between the depositor and the bank, if:
        •   The bank has an active contractual relationship with the depositor of at least 12 months duration;
        •   The depositor has a borrowing relationship with the bank for residential loans or other long term loans; or
        •   The depositor has a minimum number of active products, other than loans, with the bank;
        Or
        b) The deposits are in transactional accounts (e.g. accounts where salaries are automatically deposited).
        B. Less Stable Deposits
        (i) Cash outflows related to retail term deposits with a residual maturity or withdrawal notice period greater than 30 days will be excluded from the total expected cash outflows if the depositor has no legal right to withdraw deposits within the 30-day horizon of the LCR, or if early withdrawal results in a significant penalty greater than the loss of profits payable on the deposit;
        (ii) The CBB may, at its discretion, apply run-off rates on these deposits if there are concerns that depositors might withdraw their deposits in the same manner as demand deposits during either normal or stress times, or if there are concerns that banks may have to repay such deposits early in stressed times for reputational reasons;
        (iii) If a bank is unable to readily identify which retail deposits would qualify as 'stable' according to the definition provided above, it must place the full amount in the 'less stable' category; and
        (iv) Run-off rates shall be applied to less stable deposits as outlined in Appendix A.

        6 6 'Fully insured' means that 100 percent of the deposit amount is covered by an effective deposit insurance scheme. Deposit balances up to the deposit insurance limit can be treated as "fully insured". However, any amount in excess of the deposit insurance limit is to be treated as less stable'. For example, if a depositor has a deposit of BD 150,000 that is covered by a deposit insurance scheme, which has a limit of BD 100,000, where the depositor would receive at least BD 100,000 from the deposit insurance scheme if the bank were unable to pay, then BD 100,000 would be considered "fully insured" and treated as stable deposits, while BD 50,000 would be treated as less stable deposits.

        6 An established relationship is deemed to exist between the depositor and the bank, if:

        •   The bank has an active contractual relationship with the depositor of at least 12 months duration; or
        •   The depositor has a borrowing relationship with the bank for residential loans or other long term loans; or

        The depositor has a minimum number of active products, other than loans, with the bank.

        August 2018

    • Unsecured Wholesale Funding

      • LM-11.3.5

        Unsecured wholesale funding is defined as those liabilities due to non-naturalised persons (i.e. legal entities, including sole proprietorships) and are not collateralized by legal rights to specifically designated assets owned by the bank in the case of bankruptcy, insolvency, liquidation or resolution. Obligations related to derivative contracts are excluded from this definition.

        August 2018

      • LM-11.3.6

        Bahraini conventional bank licensees must include all funding which is callable within the LCR's horizon of 30 days or that has its earliest possible contractual maturity date situated within this horizon (such as maturing term deposits and unsecured debt securities), as well as funding with an undetermined maturity. This must also include funding with options that are exercisable at the investor's discretion within the 30-day calendar day horizon. For funding with options exercisable at the bank's discretion where there is a possibility of not exercising the option (e.g. for reputational reasons), banks must include these liabilities as outflows.

        August 2018

      • LM-11.3.7

        Wholesale funding that is callable by the funds provider subject to a contractually defined and binding notice period exceeding 30 days must not be included in the calculation of the LCR.

        August 2018

      • LM-11.3.8

        For the purpose of the LCR, deposits and unsecured wholesale funding are to be categorized as below (please see Appendix A).

        A. Unsecured Wholesale Funding Provided by Small Business Customers
        (i) This category includes deposits and other funds provided by small business customers (other than financial institutions). For the purpose of these requirements, small business customer deposits are defined as deposits which have the same characteristics of retail accounts, provided that total aggregate funding raised from one small business customer is less than BHD 500,000 (on a consolidated basis where applicable); and
        (ii) Term deposits provided by small business customers are treated the same way as retail deposits.
        B. Operational Deposits Generated by Clearing, Custody and Cash Management Activities
        (i) Certain banking activities that lead to financial and non-financial customers needing to place, or leave deposits with a bank in order to facilitate their access and ability to use payment and settlement systems and otherwise make payments. These funds may receive a 25 percent run-off factor, only if the customer has a substantive dependency with the bank and the deposit is required for such activities. Banks must seek the CBB's prior approval on such accounts and the CBB may choose not to allow the banks to use operational deposit run-off rates in certain cases;
        (ii) Qualifying activities in this context refer to clearing, custody or cash management activities that meet the following criteria;
        a. The customer is reliant on the bank to perform these services as an independent third-party intermediary over the next 30 days. For example, this condition would not be met if the customer has alternative back-up arrangements;
        b. These services must be provided under a legally binding agreement; and
        c. The termination of such arrangements shall be subject either to a notice period of at least 30 days, or significant switching costs to be borne by the customer if the operational deposits are moved before 30 days.
        (iii) Qualifying operational deposits generated by such activities are ones where:
        a. The deposits are held in specifically designated accounts and priced without giving an economic incentive to the customer for maintaining such deposits; and
        b. The deposits are by-products of the underlying services and not solicited in bulk in the wholesale market.
        (iv) Any excess balances that could be withdrawn, leaving enough funds to fulfil the clearing, custody and cash management activities, do not qualify for the 25 percent run-off rate. Only that portion of the deposit which is proven to meet the customer's needs can qualify as stable. Excess balances must be treated in the category for non-operational deposits;
        (v) Banks must determine methodology for identifying excess balances in operational accounts;
        (vi) If the deposit arises out of correspondent banking, or from the provision of prime brokerage services, it will be treated as if there were no operational activities for the purpose of determining run-off factors; and
        (vii) That portion of the operational deposits generated by clearing, custody and cash management activities that is fully covered by deposit insurance can receive the same treatment as 'stable' retail deposits and, as such, can be subject to the 5 percent runoff rate factor.
        C. Unsecured Wholesale Funding Provided by Non-financial Corporates and Sovereigns, Central Banks, Multilateral Development Banks and PSEs

        This category comprises all deposits and other extensions of unsecured funding from non-financial corporate customers (that are not categorized as small business customers) and both domestic and foreign sovereign, central bank, multilateral development bank and PSE, Bahrain's Social Insurance Organization and GCC, Public Investment Funds (PIFs)7 that are not held for operational purposes. The run-off factor for these funds is 40 percent and, in cases where the deposit is fully insured, the run-off factor shall be 20 percent.
        D. Unsecured Wholesale Funding Provided by Other Legal Entity Customers
        (i) This category comprise all deposits and other funding from other institutions (including banks, securities firms, insurance companies, etc.), fiduciaries, beneficiaries, special purpose vehicles, affiliated entities of the bank and other entities that are not specifically held for operational purposes and included in the prior categories. The run-off factor for these funds is 100 percent:
        (ii) All notes, bonds and other debt securities issued by the bank are included in this category regardless of the holder, unless the bond is sold exclusively in the retail market and held in retail accounts (including small business customer accounts treated as retail, as per LM-11.3.8A) in which the instruments can be treated in the appropriate retail or small business customer deposit category. To be treated as such, it is not sufficient that the debt instruments are specifically designed and marketed to retail or small business customers, but rather there must be limitations placed such that those instruments cannot be bought and held by parties other than retail or small business customers; and
        (iii) Customer cash balances arising from the provision of prime brokerage services must be considered separate from any balances related to client protection regimes imposed by the regulatory authorities, and must not be netted against other customer exposures included in this Module.

        7 Only deposits from GCC PIFs where the PIF is a controller of the bank must be included under this classification.

        August 2018

    • Secured Funding

      • LM-11.3.9

        Secured funding is defined as those liabilities and general obligations that are collateralised by legal rights to specifically designated assets owned by the bank in the case of bankruptcy, insolvency, liquidation or resolution. The amount of outflow is calculated based on the amount of funds raised through the transaction, and not the value of the underlying collateral. The table below summarises the applicable factors:

        Categories for outstanding maturing secured Amount to add to cash flows %
        Backed by Level 1 assets or with central banks 0%
        Bank by Level 2A assets 15%
        •   Secured funding transactions with domestic sovereign, PSE or multilateral development bank that are not backed by Level 1 or 2 assets
        •   Backed by RMBS eligible for inclusion in Level 2B
        		 25%
        Backed by other Level 2B assets 50%
        All other transactions 100%
        August 2018

    • Other Cash Outflows

      • LM-11.3.10

        Additional items and their runoff rates as follows:

        A. Derivatives cash outflows:
        (i) The sum of all net cash outflows will receive a 100 percent factor. Banks must calculate, in accordance with their existing valuation methodologies, expected contractual derivative cash inflows and outflows. Cash flows must be calculated on a net basis (i.e. inflows can offset outflows) by counterparty, only where a valid master netting agreement exists. The banks must exclude from such calculations, those liquidity requirements that would result from increased collateral needs due to market value movements or falls in value of collateral posted. Options must be assumed to be exercised when they are in the money to the option buyer;
        (ii) Where derivative payments are collateralized by HQLA, cash outflows must be calculated net of any corresponding cash inflows arising from collateral received for derivatives, or that would result from contractual obligations for cash or collateral to be provided to the bank, if the bank is entitled to re-use the collateral in new transactions; and
        (iii) Below run-off rates apply in the following cases:
        a. Increased liquidity needs related to downgrade triggers embedded in financing transactions, derivatives and other contracts. Banks must review those contracts in detail and identify the clauses that require the posting of additional collateral or early repayment upon the ratings downgrades, by and up to three notches. A 100 percent run-off rate will be applied to the amount of collateral that would be posted for, or contractual cash outflows associated with, the credit rating downgrades;
        b. Increased liquidity needs related to the changes in the market value of the bank's posted collateral. A run-off rate of 20 percent must apply to cover the possibility of changes in value of the collateral posted by the bank in the derivatives contract, as well as other transactions. This rate must apply to all collateral, excluding level 1 assets after offsetting the collateral posted by the same counterparty, which can be used again without any restrictions. This rate will be calculated based on the notional amount of the asset after any other applicable haircuts;
        c. A run-off rate of 100 percent will apply to non-segregated collateral that could contractually be recalled by the counterparty because the collateral is in excess of the counterparty's current collateral requirements;
        d. A run-off rate of 100 percent will apply to the collateral that is contractually due, but where the counterparty has not yet demanded the posting of such collateral;
        e. A run-off rate of 100 percent will apply to the amount of HQLA collateral that can be substituted for non-HQLA assets without the bank's consent; and
        f. Banks must calculate the liquidity needs to face potentially substantial liquidity risk exposures, to valuation changes of derivative contracts. This must be calculated by identifying the largest absolute net 30-day collateral flow realized during the preceding 24 months. The net flows of collateral must be calculated by offsetting the collateral inflows and outflows. This must be executed using the same Master Netting Agreement ('MNA')
        B. Asset Backed Securities, Covered Bonds and Other Structured Financing Instruments

        Such transactions are subject to a run-off rate of 100 percent of the funding transaction maturing within the 30-day period, when these instruments are issued by the bank itself (assuming that the refinancing market will not exist).
        C. Asset-backed Commercial Paper, Securities Investment Vehicles and Other Financing Facilities

        A run-off rate of 100 percent must apply to the payments due within a 30-day period. In cases where assets are returnable, a run-off rate of 100 percent must apply to the returned assets when there are derivatives, or derivative-like components, contractually mentioned in the agreements for the structure, allowing the 'return' of assets in a financing arrangement (assuming that the refinancing market will not exist).
        D. Asset-backed Commercial Paper, Securities Investment Vehicles and Other Financing Facilities

        A run-off rate of 100 percent must apply to the payments due within a 30-day period. In cases where assets are returnable, a run-off rate of 100 percent must apply to the returned assets when there are derivatives, or derivative-like components, contractually mentioned in the agreements for the structure, allowing the 'return' of assets in a financing arrangement (assuming that the refinancing market will not exist).
        E. Drawdowns on Committed Credit and Liquidity Facilities

        These facilities include contractually irrevocable ('committed') or conditionally revocable agreements to extend funds. Unconditionally revocable facilities that are unconditionally cancellable are excluded from this section and included in 'Other Contingent Funding Liabilities' section for the purpose of the following requirements:
        (i) When calculating the facilities mentioned in the preceding paragraph, the currently undrawn portion of these facilities is the calculated net of any HQLA if the HQLA have already been posted as collateral by the counterparty to secure the facilities, or are contractually obliged to be posted when the counterparty will draw down the facility if the bank is entitled to re-use the collateral and there is no undue correlation between the probability of drawing the facility and the market value of the collateral. In such cases, the assets posted as collateral can be netted to the extent that this collateral is not already counted in the stock of HQLA, as per these requirements;
        (ii) For the purpose of these requirements, a liquidity facility is defined as any committed, undrawn (unused) backup facility that would be utilized to refinance the debt obligations of a customer in situations where such a customer is unable to rollover that debt in financial markets. To calculate the LCR, an amount equivalent to the currently outstanding debt issued by the customer maturing within a 30-day period is taken, while excluding the portion of the backing debt within this period. General working capital facilities for corporate entities will not be classified as liquidity facilities, but as credit facilities. Any other undrawn facilities will be classified as credit facilities; and
        (iii) Any facilities provided to hedge funds and special purpose funding vehicles or other vehicles used to finance the banks own assets, must be captured in their entirety as a liquidity facility, to other legal entities.
        F. Contractual Obligations To Extend Funds Within a 30-day Period

        Any contractual lending obligations to financial institutions not captured elsewhere in the requirements must be captured here at a 100 percent run-off rate.

        If the total of all contractual obligations to extend funds to retail and non-financial corporate clients within the next 30 calendar days (not captured in the prior categories) exceeds 50 percent of the total contractual inflows due in the next 30 calendar days from these clients, the difference must be reported as a 100 percent outflow (i.e. the excess above 50 percent of the total inflow of these clients within a period of 30 days).
        G. Other Contingent Funding Obligations

        The table below shows the cash outflow run-off rates for other contingent funding obligations:

        Table: Run-off rates for Other Contingent Funding Obligations

        Type of Contingent Funding Run-off Rates (%)
        Revocable and unconditional financing and liquidity facilities 'uncommitted'. 5%
        Non-contractual contingent funding obligations related to potential liquidity draws from joint venture or minority investments in entities. 5%
        Obligations related to trade financing (including letters of guarantee and letters of credit). 5%
        Guarantees and letters of credit unrelated to trade finance obligations. 5%
        Non-contractual commitments related to customers' short positions covered by other customers' collateral. 50%
        Outstanding debt securities/Sukuk (more than 30 days maturity). 5%
        Any other non-contractual obligations not captured above. 5%
        (i) Lending commitments, such as direct import or export financing for non-financial corporate firms are excluded from this treatment and banks will apply the run-off rates specified in Appendix A; and
        (ii) A 100 percent run-off rate must apply for any other contractual cash outflows within the next 30 calendar days, not captured above, other than operational expenses (which are not covered by this Module).
        August 2018