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19. The scenario for this standard entails a combined idiosyncratic and market-wide shock that would result in:
(a)
the run-off of a proportion of retail deposits;
(b)
a partial loss of unsecured wholesale funding capacity;
(c)
a partial loss of secured, short-term financing with certain collateral and counterparties;
(d)
additional contractual outflows that would arise from a downgrade in the bank’s public credit rating by up to and including three notches, including collateral posting requirements;
(e)
increases in market volatilities that impact the quality of collateral or potential future exposure of derivative positions and thus require larger collateral haircuts or additional collateral, or lead to other liquidity needs;
(f)
unscheduled draws on committed but unused credit and liquidity facilities that the bank has provided to its clients; and
(g)
the potential need for the bank to buy back debt or honour non-contractual obligations in the interest of mitigating reputational risk.
20. In summary, the stress scenario specified incorporates many of the shocks experienced during the crisis that started in 2007 into one significant stress scenario for which a bank would need sufficient liquidity on hand to survive for up to 30 calendar days.
21. This stress test should be viewed as a minimum supervisory requirement for banks. Banks are expected to conduct their own stress tests to assess the level of liquidity they should hold beyond this minimum, and construct their own scenarios that could cause difficulties for their specific business activities. Such internal stress tests should incorporate longer time horizons than the one mandated by this standard. Banks are expected to share the results of these additional stress tests with supervisors.
22. The LCR has two components:
(a)
Value of the stock of HQLA in stressed conditions; and
(b)
Total net cash outflows, calculated according to the scenario parameters outlined below.
Stock of HQLA
≥ 100%
Total net cash outflows over the next 30 calendar days
