Liquidity Coverage Ratio and Reducing balance: Difference between pages

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''Bank regulation''.
1.


(LCR).
A basis of allocating costs or allowances across successive time periods by applying a consistent periodic percentage charge to - for example - the reducing net book value of a fixed asset.


The LCR is a requirement under Basel III for a bank to hold high-quality liquid assets (HQLAs) sufficient to cover 100% of its net cash requirements over 30 days.


It applies throughout the European Union.
'''Example'''


The LCR has been implemented in stages from 2015, to reach the 100% requirement by January 2019.
A fixed asset has a cost of $12m,  


to be depreciated on a reducing balance basis at a rate of 40% per year.


It reduces the value to a bank of cash deposits of less than 30 days tenor because they are only worth the income on the HQLAs if a bank forecasts no short term cash receipts to cover repayment.


The purpose of this requirement is to ensure that banks can manage stressed market conditions, under which the bank is assumed to suffer substantial outflows of the cash previously deposited with it.
The depreciation charge for Year 1 would be:
 
= $12m x 40%
 
= $4.8m.
 
 
The net book value at the end of Year 1 (and the start of Year 2):
 
= 12 - 4.8
 
= $9.2m.
 
 
The depreciation charge for Year 2:
 
= $9.2m x 40%
 
= $3.68m.
 
 
The net book value at the end of Year 2 (and the start of Year 3):
 
= 9.2 - 3.68
 
= $5.52m.
 
 
And so on.
 
Using a reducing balance basis of depreciation, the net book value never falls to zero (unless the asset is disposed of).
 
 
2.
 
''UK tax.''
 
UK Writing Down tax Allowances are normally available to be claimed on a reducing balance basis.




== See also ==
== See also ==
* [[Basel III]]
* [[Depreciation]]
* [[European Union]]
* [[Straight line]]
* [[Net Stable Funding Ratio]]
* [[Sum of the digits]]
* [[Cash investing in a new world]]
* [[Writing down allowance]]
* [[HQLA]]
* [[Level 1 liquid assets]]
* [[Level 2 liquid assets]]
* [[Leverage Ratio]]
* [[Liquidity buffer]]
* [[Liquidity risk]]
* [[LR]]
* [[OLAR]]
* [[Pillar 1]]
* [[Required Stable Funding]]
* [[Survival period]]


[[Category:Compliance_and_audit]]
[[Category:Accounting,_tax_and_regulation]]
[[Category:Liquidity_management]]

Revision as of 12:35, 18 March 2015

1.

A basis of allocating costs or allowances across successive time periods by applying a consistent periodic percentage charge to - for example - the reducing net book value of a fixed asset.


Example

A fixed asset has a cost of $12m,

to be depreciated on a reducing balance basis at a rate of 40% per year.


The depreciation charge for Year 1 would be:

= $12m x 40%

= $4.8m.


The net book value at the end of Year 1 (and the start of Year 2):

= 12 - 4.8

= $9.2m.


The depreciation charge for Year 2:

= $9.2m x 40%

= $3.68m.


The net book value at the end of Year 2 (and the start of Year 3):

= 9.2 - 3.68

= $5.52m.


And so on.

Using a reducing balance basis of depreciation, the net book value never falls to zero (unless the asset is disposed of).


2.

UK tax.

UK Writing Down tax Allowances are normally available to be claimed on a reducing balance basis.


See also