Monitoring Liquidity: formula sheet

Key formulas

Funding liquidity risk

Cash outflows due > cash available (inflows + buffer + raisable funding)

A liability-side concept: inability to meet obligations when due at acceptable cost.

Market liquidity cost (proportional spread)

Relative spread = (Ask − Bid) ÷ Mid price, where Mid = (Ask + Bid) ÷ 2

Cost of a round trip is the full spread; selling one unit immediately costs about half the spread versus mid.

Liquidity gap

Net gap = Cash inflows − Cash outflows over a time bucket

A negative gap means funding must be raised or buffers used.

Liquidity spiral

Funding stress → asset sales → price falls → losses and higher haircuts → more funding stress

The core interaction of funding and market liquidity.

Liquidity Coverage Ratio

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

Both parts are measured under the prescribed stress scenario.

Total net cash outflows

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.

Expected outflows or inflows

Amount × run-off rate (outflows) or Amount × inflow rate (inflows)

Use the category-specific rate prescribed by Basel.

HQLA haircuts

Level 1: 0%. Level 2A: 15%. Level 2B: RMBS 25%; corporate debt and equities 50%

Haircut is applied to market value before adding to the stock.

HQLA composition caps

Level 2 ≤ 40% of HQLA; Level 2B ≤ 15% of HQLA

Caps are measured after haircuts. Equivalent form: Level 2 ≤ 2/3 × Level 1; Level 2B ≤ 15/85 × (Level 1 + Level 2A).

Typical run-off rates

Stable retail 5%; less stable retail 10%; non-financial corporate unsecured 40%; financial institution unsecured 100%

Operational deposits are 25%; undrawn credit facilities vary by counterparty.

NSFR

NSFR = Available Stable Funding (ASF) ÷ Required Stable Funding (RSF) ≥ 100%

Horizon is one year. A ratio below 100% means a structural funding shortfall.

ASF

ASF = Σ (carrying value of each capital or liability item × its ASF factor)

Capital and liabilities with residual maturity of one year or more: 100%. Stable retail and small-business deposits with residual maturity under one year: 95%. Less stable retail and small-business deposits with residual maturity under one year: 90%. Non-financial corporate funding under one year: 50%. Financial institution funding with residual maturity of six months to under one year: 50%. Operational deposits: 50%. Financial institution funding under six months: 0%.

RSF

RSF = Σ (carrying value of each asset or off-balance-sheet item × its RSF factor)

Cash and central bank reserves: 0%. Unencumbered Level 1: 5%. Level 2A: 15%. Level 2B: 50%. Performing loans to financial institutions under six months: 10% if secured by Level 1 assets, otherwise 15%. Performing loans to financial institutions with maturity of six months to under one year: 50%. Performing loans to non-financial corporates and retail customers with maturity under one year: 50%. Performing loans to non-financial corporates and retail customers with risk weight of 35% or less and maturity of one year or more: 65%. Other such performing loans with maturity of one year or more: 85%. Defaulted loans and other long-term assets: mostly 100%.

Funding surplus or shortfall

Surplus = ASF − RSF

A negative value is the stable funding the bank must raise to reach 100%.

LCR (for contrast)

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

Short-term stress measure. NSFR is the one-year structural measure.

Contractual maturity mismatch (gap)

Gap in bucket = Contractual inflows − Contractual outflows

Negative gap means a funding need in that bucket. Use contractual terms only.

Cumulative gap

Cumulative gap at bucket t = Σ (inflows − outflows) from the first bucket to t

Shows the total funding need accumulated over the horizon.

Funding concentration ratio

Concentration = Funding from a counterparty (or instrument) ÷ Total liabilities

Compare with the significance threshold. Basel uses 1% of total liabilities for a significant counterparty or product.

Unencumbered assets share

Unencumbered assets ÷ Total assets

Report by currency and location. Only assets free of pledges count.

Significant currency test

Liabilities in currency ÷ Total liabilities ≥ 5%

If true, report LCR in that currency.

Net gap for a bucket

Net gap(t) = Inflows(t) − Outflows(t)

Negative means a net funding need in that bucket.

Cumulative gap

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

Add buckets in order from the shortest. Do not sum buckets out of sequence.

Cumulative position with buffer

Cumulative position(T) = Opening counterbalancing capacity + Cumulative gap(T)

Use the stressed value of the buffer, after haircuts and any assets that are encumbered.

Survival horizon

Survival horizon = last bucket before Cumulative position(T) < 0

Compute under each scenario. A shorter horizon under stress is expected.

Stressed outflow

Stressed outflow = Balance × runoff rate

Runoff rates differ by funding type: stable retail, less stable retail, unsecured wholesale.

Stressed value of a liquid asset

Stressed cash = Market value × (1 − haircut)

Apply the haircut before counting an asset as buffer.

Gap limit check

Breach if |Cumulative gap| > limit, for a negative cumulative gap

Limits are often set as a percentage of total assets or as an absolute amount per bucket.

Net cash outflow in stress

Net outflow = Stressed outflows − Stressed inflows

Apply run-off rates to liabilities and haircuts or lower inflow rates to assets. Do this for each horizon.

Stressed outflow on a liability

Outflow = Balance × Run-off rate

Less stable funding, such as unsecured wholesale, has higher run-off than stable retail deposits.

Survival check

Survives if Counterbalancing capacity (after haircuts) ≥ Cumulative net outflow

Use the value of assets after haircuts, not market value.

Survival horizon

Survival horizon = last period before cumulative net outflow exceeds counterbalancing capacity

The first period where cumulative net outflow exceeds capacity is the breach date, not the survival horizon. If the buffer is never exceeded, the bank survives the full horizon.

Liquidity Coverage Ratio

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

Regulatory 30-day stress measure. Net outflows have inflows capped at 75% of outflows.

Net cumulative position

Net position(t) = Σ payments received up to t − Σ payments sent up to t

Track it through the day; a negative value means intraday liquidity is being used.

Daily maximum liquidity usage

Max usage = largest negative net cumulative position during the day = −min over t of Net position(t)

If the position is never negative, usage is zero. Usage is measured from the start-of-day position.

Available intraday liquidity

Available = central bank balance + unencumbered liquid assets that can be pledged + collateral pledged at payment systems + contractually committed intraday credit lines received

Basel reports it at the start of the day and at its minimum during the day. Do not add net payments received here; that belongs to usage. Compute headroom separately: Headroom = Available − maximum usage.

Total payments

Total payments = gross value sent and received, per day

A scale measure of activity, not a measure of net need.

Intraday throughput

Throughput(t) = cumulative value of outgoing payments settled by t ÷ total outgoing payments for the day

A low early throughput shows a bank waits for receipts before paying.

Quick revision

• Funding liquidity is the ability to meet obligations when due; market liquidity is the ability to sell assets without a large price impact.
• LCR = stock of HQLA ÷ total net cash outflows over the next 30 calendar days, minimum 100%.
• Total net cash outflows = outflows minus the lesser of inflows and 75% of outflows.
• Level 1 assets are the highest quality; lower levels face haircuts and caps in the HQLA stock.
• NSFR = available stable funding ÷ required stable funding, minimum 100%, over a one-year horizon.
• LCR covers short-term stress resilience; NSFR limits reliance on short-term funding against long-term assets.
• Retail and wholesale deposits get different run-off or ASF factors, based on how stable they are expected to be.
• Cumulative gap = running sum of net inflows minus outflows across time buckets; a negative gap means a funding need.
• Stress tests change assumptions on run-offs, haircuts and market access; the CFP sets triggers and actions for the result.
• Intraday liquidity needs monitoring of payments, available intraday funds and timing of inflows and outflows against peak usage.
• Always check the direction: higher ratio means a stronger position, and below 100% is a breach of the minimum.

Common mistakes

• Treating funding liquidity and market liquidity as the same thing. Fix: Funding is about meeting obligations (liabilities); market is about trading assets at fair prices (assets).
• Assuming an insolvent bank is the same as an illiquid bank. Fix: A solvent bank can run out of cash. Liquidity is about timing of cash; solvency is about assets exceeding liabilities. Losses from fire sales can link the two.
• Applying the 75% cap to inflows as a percentage of HQLA or net outflows. Fix: Cap inflows at 75% of gross outflows. Net outflows therefore cannot go below 25% of gross outflows.
• Forgetting haircuts before applying the Level 2 cap. Fix: Haircut first, then test the 40% and 15% caps on the adjusted values.
• Confusing the ASF and RSF direction, giving high-quality liquid assets a high factor. Fix: Remember that liquid assets are easy to sell, so they need little stable funding. Cash is 0% RSF.
• Mixing LCR and NSFR horizons. Fix: LCR is 30 days and HQLA over net outflows. NSFR is one year and ASF over RSF.
• Treating monitoring tools as binding minimums like the LCR. Fix: Remember they are supervisory information tools with no required level.
• Adding behavioural assumptions, such as deposit stickiness, to contractual maturity mismatch. Fix: The Basel tool uses contractual cash flows only.
• Treating a cumulative gap as the single-bucket gap Fix: Re-read the column label. Rebuild the running total yourself from the net gaps when unsure.
• Counting the full market value of liquid assets as buffer Fix: Apply the haircut first. Also exclude assets that are already pledged.

Exam tips

• Questions often hide the answer in one phrase: unable to roll over means funding, unable to sell without a price drop means market.
• Expect scenarios where one risk triggers the other. Choose the option that explains the feedback loop.
• Remember the sources outside the balance sheet: credit line drawdowns and collateral calls.
• For spread questions, check whether the question asks for the full spread or the cost of one-way trade; the latter is half.
• Memorise the haircuts and the main run-off rates: they are tested directly in many questions.
• Always check the 75% inflow cap. Questions often give inflows larger than the cap.
• Check Level 2 and Level 2B caps when the asset mix is heavy in lower-quality assets.
• Know why LCR and NSFR differ: LCR is a 30-day stress test of liquid assets; NSFR is a one-year structural funding measure.