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A bank that needs to use an alternative treatment to meet its LCR must report its level of usage to the bank supervisor on a regular basis.
2. A bank is required to keep its supervisor informed of its usage of the options so as to enable the supervisor to manage the aggregate usage of the options in the jurisdiction and to monitor, where necessary, that banks using such options observe the relevant supervisory requirements.
3. While bank-by-bank approval by the supervisor is not required for use of the ALA options, this will not preclude individual supervisors from considering specific approval for banks to use the options should this be warranted based on their jurisdiction-specific circumstances. For example, use of Option 1 will typically require central bank approval of the committed facility.
(ii)
A bank should not use an alternative treatment to meet its LCR more than its actual need as reflected by the shortfall of eligible HQLA to cover its HQLA requirements in the relevant currency.
4. A bank that needs to use the options should not be allowed to use such options above the level required to meet its LCR (including any reasonable buffer above the 100% standard that may be imposed by the supervisor). Banks may wish to do so for a number of reasons. For example, they may want to have an additional liquidity facility in anticipation of tight market conditions. However, supervisors may consider whether this should be accommodated. Supervisors should also have a process (eg through periodic reviews) for ensuring that the alternative HQLA held by banks are not excessive compared with their actual need. In addition, banks should not intentionally replace its stock of Level 1 or Level 2 assets with ineligible HQLA to create a larger liquidity shortfall for economic reasons or otherwise.
(iii)
A bank must demonstrate that it has taken reasonable steps to use Level 1 and Level 2 assets and reduce the amount of liquidity risk (as measured by reducing net cash outflows in the LCR) to improve its LCR, before applying an alternative treatment.
5. Holding a HQLA portfolio is not the only way to mitigate a bank’s liquidity risk. A bank must show that it has taken concrete steps to improve its LCR before it applies an alternative treatment. For example, a bank could improve the matching of its assets and liabilities, attract stable funding sources, or reduce its longer term assets. Banks should not treat the use of the options simply as an economic choice.
(iv)
A bank must use Level 1 assets to a level that is consistent with the availability of the assets in the market. The minimum level will be set by the bank supervisor for compliance.
6. In order to ensure that banks’ usage of the options is not out of line with the availability of Level 1 assets within the jurisdiction, the bank supervisor may set a minimum level of Level 1 assets to be held by each bank that is consistent with the availability of Level 1 assets in the market. A bank must then ensure that it is able to hold and maintain Level 1 assets not less than the minimum level when applying the options.
