Basel III liquidity norms for banks to kick off on 1 January 2015

The Reserve Bank of India (RBI) has given banks four years beginning 1 January 2015 to fully comply with Basel III liquidity requirements, including lliquidity coverage ratio (LCR), liquidity risk monitoring tools and LCR disclosure standards.

RBI said it would introduce Basel III liquidity coverage ratio (LCR) in a phased manner starting with a minimum requirement of 60 per cent from 1 January 2015 and reaching minimum 100 per cent on 1 January 2019.

RBI had, in the first bi-monthly `Monetary Policy Statement, 2014-15' announced on 1 April 2014, had proposed to issue guidelines relating to Basel III LCR and Liquidity Risk Monitoring tools by end-May 2014 as the liquidity coverage ratio (LCR) stipulated by the Basel Committee becomes a standard with effect from 1 January 2015.

The RBI further said the LCR requirement would rise in equal steps to reach the minimum required level of 100 per cent on 1 January 2019.

"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 on Monday.

"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 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.

Effective 1 January 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 31 March 2015.