Liquidity Risk Reporting and Stress Testing: formula sheet

Key formulas

Net cash flow gap (per bucket)

Gap = Cash inflows − Cash outflows

Compute for each time bucket. Positive is a surplus, negative is a shortfall.

Cumulative gap

Cumulative gap(t) = Σ Gap(i) for buckets i = 1 to t

Use this to find the first bucket where funding need appears.

Liquidity Coverage Ratio

LCR = Stock of HQLA ÷ Total net cash outflows over 30 days ≥ 100%

Net outflows = outflows − min(inflows, 75% of outflows). This is a stock-versus-stressed-flow ratio.

Net Stable Funding Ratio

NSFR = Available stable funding ÷ Required stable funding ≥ 100%

Covers a one-year horizon and the structure of the balance sheet.

Loan-to-deposit ratio

LTD = Total loans ÷ Total deposits

A simple stock ratio. Higher means more reliance on non-deposit funding.

Funding concentration

Concentration = Funding from a counterparty (or group) ÷ Total funding

Compare with a limit. Basel monitoring flags significant counterparties above 1% of total liabilities.

Contractual maturity mismatch (gap)

Gap in a time band = contractual inflows − contractual outflows

Negative gap means a funding need in that band. No behavioural assumptions are used. Also read the cumulative gap.

Cumulative gap

Cumulative gap at band n = Σ (gaps from band 1 to band n)

Shows how the shortfall builds over time.

Funding concentration ratio

Share = funding from a source ÷ total liabilities

Basel treats a counterparty or instrument/product above 1% of total liabilities as significant, and a currency above 5% as significant. The 5% significant-currency definition also sets which currencies the LCR by significant currency tool covers.

Unencumbered asset test

Available unencumbered assets = assets with no legal, regulatory, contractual or other restriction on being pledged, sold or used

Assets already pledged as collateral are excluded.

Tool list

Maturity mismatch; funding concentration; available unencumbered assets; LCR by significant currency; market-related tools

Monitoring tools, with no minimum standard.

Stressed net cash outflow

Net outflow = Σ (balance × run-off rate) + drawdowns + collateral calls − Σ (inflows × inflow rate)

Compute per horizon. Inflows are often capped or haircut because borrowers may not repay on time.

Liquidity buffer after haircuts

Buffer = Σ (market value × (1 − haircut))

Use stressed haircuts, not normal ones. Exclude encumbered assets.

Surplus or shortfall

Surplus = Buffer − Net outflow

Negative means a shortfall. The firm needs more buffer or must cut outflows.

Survival horizon

Survival horizon = the longest horizon at which cumulative buffer ≥ cumulative net outflow

The first day cumulative net outflow exceeds the buffer marks the end of survival.

Scenario hierarchy

Idiosyncratic and market-wide are separate; combined is the most severe

Run all three, plus a reverse stress test.

Net cash flow in a period

Net cash flow(t) = Stressed inflows(t) − Stressed outflows(t)

Apply stress run-off and drawdown rates to outflows, and lower roll-over or collection rates to inflows.

Cumulative net cash flow

Cumulative gap(T) = Σ Net cash flow(t), t = 1 to T

A negative value is the funding need that must be covered by the buffer.

Survival horizon

Survival horizon = the first day T at which Buffer + Cumulative net cash flow(T) < 0

The bank survives up to the day before this. If it never turns negative, the horizon exceeds the test period.

Buffer after haircut

Usable buffer = Σ Market value × (1 − haircut), for unencumbered assets only

Exclude encumbered or non-transferable assets.

Required buffer for a target horizon

Required buffer ≥ Maximum cumulative net outflow over the target horizon

Use the peak of the cumulative path, not only the final day.

Simple daily survival estimate

Days survived ≈ Usable buffer ÷ Average daily net stressed outflow

Valid only when outflows are roughly constant; otherwise use the cumulative path.

Liquidity Coverage Ratio

LCR = Stock of HQLA ÷ Total net cash outflows over next 30 days ≥ 100%

Stress scenario of 30 calendar days. HQLA must be unencumbered and liquid in stress.

Net cash outflows (LCR)

Net outflows = Total expected outflows − MIN(Total expected inflows, 75% × Total expected outflows)

Inflows are capped, so net outflows are at least 25% of gross outflows.

Net Stable Funding Ratio

NSFR = Available stable funding ÷ Required stable funding ≥ 100%

One-year horizon. Each item is weighted by an ASF or RSF factor.

ASF and RSF

ASF = Σ (liability or capital × ASF factor); RSF = Σ (asset or off-balance-sheet item × RSF factor)

Higher ASF factor means more stable. Higher RSF factor means less liquid or longer-dated.

Horizon comparison

LCR: 30 days, short-term resilience. NSFR: 1 year, structural funding

A frequent exam contrast.

Quick revision

• Liquidity risk has two sides: funding liquidity (meeting obligations) and market liquidity (selling assets without large price impact).
• Reporting metrics should show position, trend and concentration, not only a single ratio.
• BCBS 144 monitoring tools are supervisory aids that complement, not replace, ratios like LCR and NSFR.
• A stress test is only as useful as its assumptions: runoff rates, haircuts and market access.
• Combined idiosyncratic and market-wide scenarios are usually the most severe.
• Survival horizon is the time until stressed outflows exhaust available liquidity.
• Count only liquidity that is truly available, after haircuts and operational or legal constraints.
• A contingency funding plan needs early-warning triggers, clear roles, escalation paths and prioritised funding sources.
• Plans should be tested; an untested plan may fail in a real stress.
• Stress results should feed risk appetite, limits and buffer decisions.
• Supervisors expect board oversight, sound governance and regular, well-documented stress testing.

Common mistakes

• Treating the LCR as a flow measure. Fix: Remember it compares a stock of HQLA with stressed net outflows. It is a stock-based ratio with a flow-based denominator.
• Reading a single bucket gap instead of the cumulative gap. Fix: Funding needs arise when the cumulative gap turns negative. Always add buckets in order.
• Treating the monitoring tools as minimum requirements like the LCR. Fix: Remember the LCR is a standard. The tools are supervisory information with no minimum.
• Applying behavioural assumptions to contractual maturity mismatch. Fix: The mismatch uses contractual terms only. Behavioural views belong in stress tests and the LCR.
• Treating an idiosyncratic scenario as if asset markets also freeze. Fix: In an idiosyncratic case, haircuts stay near normal and market access remains for others. Add market stress only in market-wide or combined scenarios.
• Using the same run-off rate for all deposits. Fix: Segment by insured or uninsured, retail or wholesale, operational or non-operational, and set higher run-off for the flighty segments.
• Using the unadjusted market value of the buffer. Fix: Always apply haircuts and exclude encumbered assets before any comparison.
• Dividing the buffer by the average outflow when outflows are front-loaded. Fix: Build the cumulative path. Use the shortcut only when outflows are roughly even.
• Mixing up the horizons of LCR and NSFR Fix: Remember LCR is 30 days (short-term resilience) and NSFR is one year (structural funding).
• Not capping inflows at 75% of outflows in the LCR Fix: Always compute net outflows = outflows − MIN(inflows, 75% of outflows).

Exam tips

• Be ready to label each metric as stock, flow or concentration. This is the standard conceptual test.
• In LCR numbers, apply the 75% inflow cap before dividing.
• For gap questions, build the cumulative line and find the first negative bucket.
• For reporting questions, choose the answer that links metrics to limits, triggers and escalation, with the board seeing a summary.
• Remember that Basel monitoring tools complement the LCR and NSFR and do not replace them.
• Questions often ask which tool fits a described risk. Learn the one-line purpose of each of the five.
• Watch for answers that give a tool a minimum ratio. They are wrong.
• Contractual mismatch means no behavioural assumptions. This is a favourite trap.