Standards may be adjusted during the observation period until January 1, 2015 for the LCR and until January 1, 2018 for the NSFR

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1 Summary of Basel III Liquidity Standards Standards include the 30-day Liquidity Coverage Ratio (LCR), the one-year Net Stable Funding Ratio (NSFR) and five monitoring tools, the contractual maturity mismatch, concentration of funding, available unencumbered assets, LCR by significant currency, and market-related tools Similar to the proposal released in December 2009, the standards are rules-based with limited room for flexibility, although some national discretion has been provided and the rules have been modified from the proposal in some respects ooverall, not the major re-think of the proposal that was warranted osevere market shock scenarios continue to be the basis for the standard These scenarios are appropriate for stress testing liquidity but should not form the basis of everyday liquidity risk management Over and above these extreme standards, banks are expected to conduct additional stress tests Document stresses that the standards establish minimum levels of liquidity; national authorities are free to require higher levels Reporting to supervisors to commence January 1, 2012 Standards may be adjusted during the observation period until January 1, 2015 for the LCR and until January 1, 2018 for the NSFR A QIS will be conducted using data from year-end 2010 and mid-year 2011 Liquidity Coverage Ratio The stock of high-quality, unencumbered liquid assets must be sufficient to cover completely the total net cash outflows over the next 30 calendar days under a combined idiosyncratic and market-wide shock similar to the shocks experienced beginning in 2007 ocash inflows may only offset 75% of expected outflows; that is, a bank must maintain a minimum stock of liquid assets equal to 25% of outflows in order to prevent banks from relying solely on anticipated inflows to meet cash outflows oassets should be liquid in markets during a time of stress and ideally be central bankeligible; however, central bank eligibility does not by itself constitute the basis for categorization as a high-quality liquid asset ohigh quality liquid assets can be easily and immediately converted into cash at little or no loss of value 1

2 oin order to avoid cliff effects, assets that become ineligible due to downgrade or for other reasons can continue to be included in the stock for 30 days; this is new to the standard and was not included in the proposal ounencumbered means not pledged (explicitly or implicitly) to secure, collateralize, or credit-enhance any transaction; however, in a change from the proposal Assets received in reverse repo and securities funding transactions (SFTs) that are held at the bank, have not been rehypothecated, and are legally and contractually available for the bank s use may be included Assets pledged to a public sector entity (PSE), as well as a central bank, but not used, also may be included ocommittee is reviewing the treatment of intraday liquidity risk oforeign exchange liquidity risk must be considered; banks are expected to be able to meet liquidity needs in each currency Level 1 assets that can comprise an unlimited share of the liquid assets pool are broadly similar to what was proposed in the 2009 Consultative Document, with some additional allowance for foreign currencies that match the bank s operating currency needs New category of Level 2 assets that can account for up to 40% of the total liquid assets stock, after haircuts. Level 2 liquid assets comprise: olevel 1 assets generated by SFTs or collateral swaps maturing within 30 days osubject to a 15% haircut: Marketable securities representing claims on or guaranteed by sovereigns, central banks, non-government PSEs or multilateral development banks that are assigned a 20% risk weight under the Basel standardized capital rules, traded in large, deep, and active markets, proven reliable under stressed conditions, and not an obligation of a financial institution or an affiliate of a financial institution Corporate bonds and covered bonds that are not issued by a financial institution or, in the case of corporate bonds, an affiliate of a financial institution, have a credit rating of at least AA-, traded in large, deep, and active markets, and proven reliable under stressed conditions The Committee is considering initiatives to reduce reliance on external ratings 2

3 The Committee continues its negative treatment of instruments issued by financial institutions and their affiliates out of concern over correlations New treatment for jurisdictions with insufficient liquid assets othree options are given: Contractual committed liquidity facilities from the relevant central bank Foreign currency liquid assets (provided that the resulting mismatches are justifiable and controlled and the currencies are freely and reliably convertible Additional use of Level 2 assets with higher haircuts Total net cash outflows are total expected cash outflows, multiplied by specified run-off rates, minus total expected cash inflows over the subsequent 30 calendar days Run-off rates for cash outflows: ostable retail deposit run-off rate lowered from 7.5% to 5% and less stable retail reduced from 15% to 10% Deposit insurance alone does not make a deposit stable Small business customers treated as retail customers ounsecured wholesale funding with operational relationships subject to 25% run-off factor Includes clearing, custody, or cash management services, but not correspondent banking or prime brokerage Unsecured wholesale funding provided by non-financial corporate customers, sovereigns, central banks, and PSEs with operational relationships fully covered by deposit insurance can be treated as stable retail deposits with a run-off rate of 5% odeposits in institutional networks of cooperative banks can qualify for a 25% run-off rate ounsecured wholesale funding from non-financial corporates, sovereigns, central banks, and PSEs are subject to a 75% run-off rate ounsecured wholesale funding by other institutions including financial institutions are subject to a 100% run-off rate orevised treatment of secured funding transactions (see para 87) with additional 15% bucket for funding backed by Level 2 assets and 25% bucket for transactions with domestic sovereign, central banks, or PSE risk-weighted at 20% or lower that are not backed by Level 1 or Level 2 assets 3

4 oderivatives payables subject to 100% run-off and amounts are taken into account on a net basis otreatment of other off-balance sheet items largely similar to the proposal, with outflows of 100% assumed onational discretion for run-off rates for contingent funding obligations, including unconditionally revocable credit and liquidity facilities, guarantees, letters of credit, and trade finance Inflow rates are more detailed than in the proposal omaturing reverse repo or securities borrowing transactions secured by Level 1 assets are subject to a 0% cash inflow rate; for Level 2 collateral, the rate is 15%; and for non-level 1 or Level 2 collateral, the rate is 100% However, if the collateral is rehypothecated to cover short positions, the inflow rate is 0% ooperational and cooperative banking deposits receive a 0% inflow rate olines of credit, liquidity facilities, and other contingent funding receive a 0% inflow rate oretail and small business inflows are 50% of the contractual amount, as are inflows from non-financial wholesale counterparties ofinancial wholesale counterparties are subject to a 100% inflow rate oderivatives receivables are subject to a 100% inflow rate on a net basis Net Stable Funding Ratio The available amount of stable funding must at all times meet or exceed the required amount of stable funding over a one-year time horizon under conditions of extended stress ocommittee is considering recognition of matched funding oavailable stable funding Available stable funding (ASF) is the same as in the proposal, with the addition of the portion of wholesale funding with maturities of less than a year that is expected to be sticky for an extended period of stress Increase in ASF factor to allow greater inclusion of non-maturity retail deposits with maturities of less than one year 4

5 Monitoring Tools orequired stable funding (RSF) Zero percent RSF category extended to include additional unencumbered shortterm securities and loans 20% RSF category extended to include unencumbered marketable securities with maturities of one year or greater representing claims on or guaranteed by sovereigns, central banks, and PSEs assigned a 20% risk weight New 65% RSF category for residential mortgages and other loans that qualify for a 35% risk weight under the Basel II standardized approach RSF factor for credit and liquidity facilities reduced from 10% to 5% Monitoring tools are expanded to include LCR by significant currency Similar to proposal, with some relaxation of parameters LCR by significant currency is designed to capture currency mismatches olikely added as a result of the ability to take into consideration foreign currency liquid assets oforeign currency LCR is the stock of high-quality liquid assets in each significant currency compared to total net cash outflows over a 30-day period in that currency, net of FX hedges Application Issues Reporting frequency for NSFR extended from monthly to quarterly Recognition of national discretion for certain parameters Home standards generally should apply to all consolidated legal entities except that retail and small business deposits should follow host standards Liquidity transfer restrictions need to be recognized 5

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