RBI No. 2011-12/
DBOD. BP. No.       /21.04.098/ 2011-12

February 21, 2012

The Chairmen and Managing Directors / Chief Executive Officers of
All Commercial Banks (Excluding RRBs and LABs)

Madam/Dear Sir,

Liquidity Risk Management and Basel III Framework on Liquidity Standards – Draft Guidelines

The recent global financial crisis re-emphasised the importance of sound liquidity risk management framework to the functioning of financial institutions and markets. The reversal in market conditions illustrated how quickly liquidity can evaporate and that illiquidity can last for an extended period of time. It also demonstrated that liquidity risk management at many banks/financial institutions needed improvement.

2. Deficiencies which were witnessed in liquidity risk management during the recent crisis included inadequate liquidity risk management governance, failure to address funding concentrations, lack of meaningful cash flow projections to assess the liquidity position, insufficient holdings of high quality liquid assets, gaps in stress testing and inappropriate linkage of the contingency plans with stress tests, etc. The crisis, thus, highlighted the need for banks to have adequate levels of liquidity and robust liquidity risk management systems.

3. To address these deficiencies and to strengthen liquidity risk management in banks, the Basel Committee on Banking Supervision (BCBS) published “Principles for Sound Liquidity Risk Management and Supervision” inSeptember 2008. This was followed by the publication of “Basel III: International framework for liquidity risk measurement, standards and monitoring” in December 2010 i.e., the Basel III rules text on liquidity prescribing two minimum global regulatory standards viz., liquidity coverage ratio (LCR) and net stable funding ratio (NSFR) for liquidity risk and a set of five monitoring tools.

4. The Reserve Bank, being a member of the BCBS, is fully committed to the objective of the Basel III reform package and, therefore, intends to implement these proposals for banks operating in India. Accordingly, draft guidelines on Liquidity Risk Management and Basel III Framework on Liquidity Standards have been prepared which are furnished as Annex. The draft guidelines have been presented in two sections viz., Section I and II.  Section I consolidates the various instructions/guidance on liquidity risk management that the Reserve Bank of India has issued from time to time in the past and where appropriate, harmonizes and enhances these instructions/guidance in line with the BCBS’s Principles for Sound Liquidity Risk Management and Supervision. Section II covers the Basel III guidelines on liquidity risk as will be applicable to the Indian banks. Two minimum global regulatory standards viz., LCR and NSFR as set out in the Basel III rules text will become binding from 1 January 2015 and 1 January 2018, respectively. Till then, these guidelines have been issued for compliance on best effort basis. Banks are expected to submit the liquidity returns under the Basel III framework to the Reserve Bank from the month /quarter ending June 2012.

5. Banks are required to forward their comments on the draft guidelines to the Chief General Manager-in-Charge, Department of Banking Operations and Development, 12th Floor, Central Office, Reserve Bank of India, Fort, Mumbai - 400001 by e-mail latest by March 21, 2012.

Yours faithfully,

(Deepak Singhal)
Chief General Manager in-Charge

Encl: As above