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The HQLA assets in LCR calculation are priced at "fair value" (see your footnote 1 for example) which is the present market value. The haircut is not there to a

The HQLA assets in LCR calculation are priced at "fair value" (see your footnote 1 for example) which is the present market value. The haircut is not there to account for mark-to-market losses but for potential losses due to lower market depth. This is explicitly stated in the Basel 3 rules https://www.bis.org/basel_framework/chapter/LCR/30.htm?inforce=20191215&published=20200605 https://www.bis.org/basel_framework/chapter/LCR/30.htm?infor... 30.40 footnote 1, for example. You can be insolvent and still meet LCR because LCR is based on average 30 days outflow. So if you have 600B of liabilities and 300B of assets but all those assets are HQLA 1 and your net outflow for LCR is calculated at 100B you have a 300% LCR and yet are very much insolvent.

JumpCrisscross 3y ago
> HQLA assets in LCR calculation are priced at "fair value" (see your footnote 1 for example) which is the present market value Held-to-maturity securities' fair value, under GAAP, is amortized cost [1][2]. From an accounting perspective, this sort of makes sense. From a liquidity perspective, it does not. This is specific to the American implementation of Basel III because it incorporates GAAP. [1] https://viewpoint.pwc.com/dt/us/en/pwc/accounting_guides/loans_and_investment/loans_and_investment_US/chapter_3_accounting__1_US/34_accounting_for_de_US.html https://viewpoint.pwc.com/dt/us/en/pwc/accounting_guides/loa... [2] https://libertystreeteconomics.newyorkfed.org/2015/02/available-for-sale-understanding-bank-securities-portfolios/#:~:text=Held%20to%20maturity%20(HTM)%3A,either%20of%20the%20above%20definitions https://libertystreeteconomics.newyorkfed.org/2015/02/availa....
- xmcqdpt2 3y ago
  Your link 1 specifically says the opposite, >Held-to-maturity debt securities are reported at amortized cost. This is due to the securities being held to collect contractual cash flows. As such, it would not be appropriate for an investor to recognize interim fluctuations in fair value through a fair value model since those fluctuations will not be realized by the investor. That is, HTM debt are not reported at fair value in GAAP. The fair value in that case would be the mark to market value (provided sufficient liquidity). The LCR requires HQLA be valued at fair value. I think the confusion here is that HTM securities are in fact treated differently when calculating capital adequacy requirements, which are not the same as LCR! Your second link (which btw predates the start of LCR in the US) is about capital adequacy requirements.

JumpCrisscross 3y ago

> HQLA assets in LCR calculation are priced at "fair value" (see your footnote 1 for example) which is the present market value Held-to-maturity securities' fair value, under GAAP, is amortized cost [1][2]. From an accounting perspective, this sort of makes sense. From a liquidity perspective, it does not. This is specific to the American implementation of Basel III because it incorporates GAAP. [1] https://viewpoint.pwc.com/dt/us/en/pwc/accounting_guides/loans_and_investment/loans_and_investment_US/chapter_3_accounting__1_US/34_accounting_for_de_US.html https://viewpoint.pwc.com/dt/us/en/pwc/accounting_guides/loa... [2] https://libertystreeteconomics.newyorkfed.org/2015/02/available-for-sale-understanding-bank-securities-portfolios/#:~:text=Held%20to%20maturity%20(HTM)%3A,either%20of%20the%20above%20definitions https://libertystreeteconomics.newyorkfed.org/2015/02/availa....

xmcqdpt2 3y ago
Your link 1 specifically says the opposite, >Held-to-maturity debt securities are reported at amortized cost. This is due to the securities being held to collect contractual cash flows. As such, it would not be appropriate for an investor to recognize interim fluctuations in fair value through a fair value model since those fluctuations will not be realized by the investor. That is, HTM debt are not reported at fair value in GAAP. The fair value in that case would be the mark to market value (provided sufficient liquidity). The LCR requires HQLA be valued at fair value. I think the confusion here is that HTM securities are in fact treated differently when calculating capital adequacy requirements, which are not the same as LCR! Your second link (which btw predates the start of LCR in the US) is about capital adequacy requirements.