(ii) Level 2 Assets
| 51. Level 2 assets (comprising Level 2A assets and any Level 2B assets permitted by the supervisor) can be included in the stock of HQLA, subject to the requirement that they comprise no more than 40% of the overall stock after haircuts have been applied. The method for calculating the cap on Level 2 assets and the cap on Level 2B assets is set out in paragraph 48 and Annex 1. | ||
| 52. 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: | ||
| (a) | Marketable securities representing claims on or guaranteed by sovereigns, central banks, PSEs or multilateral development banks that satisfy all of the following conditions:17 | |
| • | assigned a 20% risk weight under the Basel II Standardised Approach for credit risk; | |
| • | traded in large, deep and active repo or cash markets characterised by a low level of concentration; | |
| • | have a proven record as a reliable source of liquidity in the markets (repo or sale) even during stressed market conditions (ie maximum decline of price not exceeding 10% or increase in haircut not exceeding 10 percentage points over a 30-day period during a relevant period of significant liquidity stress); and | |
| • | not an obligation of a financial institution or any of its affiliated entities.18 | |
| (b) | Corporate debt securities (including commercial paper)19 and covered bonds20 that satisfy all of the following conditions: | |
| • | in the case of corporate debt securities: not issued by a financial institution or any of its affiliated entities; | |
| • | in the case of covered bonds: not issued by the bank itself or any of its affiliated entities; | |
| • | either (i) have a long-term credit rating from a recognised external credit assessment institution (ECAI) of at least AA-21 or in the absence of a long term rating, a short-term rating equivalent in quality to the long-term rating; or (ii) do not have a credit assessment by a recognised ECAI but are internally rated as having a probability of default (PD) corresponding to a credit rating of at least AA-; | |
| • | traded in large, deep and active repo or cash markets characterised by a low level of concentration; and | |
| • | have a proven record as a reliable source of liquidity in the markets (repo or sale) even during stressed market conditions: ie maximum decline of price or increase in haircut over a 30-day period during a relevant period of significant liquidity stress not exceeding 10%. | |
17 Paragraphs 50(d) and (e) may overlap with paragraph 52(a) in terms of sovereign and central bank securities with a 20% risk weight. In such a case, the assets can be assigned to the Level 1 category according to Paragraph 50(d) or (e), as appropriate.
18 Refer to footnote 16.
19 Corporate debt securities (including commercial paper) in this respect include only plain-vanilla assets whose valuation is readily available based on standard methods and does not depend on private knowledge, ie these do not include complex structured products or subordinated debt.
20 Covered bonds are bonds issued and owned by a bank or mortgage institution and are subject by law to special public supervision designed to protect bond holders. Proceeds deriving from the issue of these bonds must be invested in conformity with the law in assets which, during the whole period of the validity of the bonds, are capable of covering claims attached to the bonds and which, in the event of the failure of the issuer, would be used on a priority basis for the reimbursement of the principal and payment of the accrued interest.
21 In the event of split ratings, the applicable rating should be determined according to the method used in Basel II’s standardised approach for credit risk. Local rating scales (rather than international ratings) of a supervisor-approved ECAI that meet the eligibility criteria outlined in paragraph 91 of the Basel II Capital Framework can be recognised if corporate debt securities or covered bonds are held by a bank for local currency liquidity needs arising from its operations in that local jurisdiction. This also applies to Level 2B assets.