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Capital Allocation for Liquidity Risk under Pillar II

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What are possible ways to quantify liquidity risk for banks, and hence allocate capital for that risk under supervisory review (Pillar II)? Is there like an industry standard or banks are free to determine the way they asses and quntify that risk.

If for example, within 1-month horizon (cash inflows - cash outflows) is negative say -200 million, and the current liabilities of a small bank is say $100 million. How would that translate into a capital requirement for liquidity risk.

Can the new Basel III liquidity standards, LCR and NSFR, be used to infer capital requirement for liquidity risk? I understand that banks that have LCR less than 100% need to hold additional Level 1 and Level 2 high quality assets to bring their LCR to 100%, but can this additional "holding of high quality assets" be a function of the "capital requirement" for liquidity risk.



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1. Capital and Liquidity risk are different under BASEL-3. Liquidity-at-Risk (LAR) is outside of CAR (Capital at Risk).
2. The holding of Liquidity is meant to be 100% of total outflows, calculated on an intraday basis for LAR.
3. Your Asset department needs to separate long-term assets (>30days) and short-term assets (<=30 days) and treat them differently.