Are you looking to know about FALLCR full form? If yes then you came to right blog article.
FALLCR full form refers to Facility to Avail Liquidity for Liquidity Coverage Ratio. In this article you get to know about FALLCR full form and its significance in Banking. This article is written after referring and reading more than fifteen articles related to topic.
INTRODUCTION TO FALLCR
FALLCR, an acronym for Facility to Avail Liquidity for Liquidity Coverage Ratio, is a mechanism designed to support banks in meeting the liquidity requirements set by the Liquidity Coverage Ratio (LCR). To understand FALLCR, it is essential to grasp the concept of LCR and its significance for banks.
UNDERSTANDING LIQUIDITY COVERAGE RATIO (LCR)
LCR is a crucial short-term liquidity ratio that banks are mandated to maintain. It ensures that banks have sufficient high-quality liquid assets (HQLA) to withstand a severe stress scenario lasting 30 days. The LCR should ideally be 100% or more, meaning that the stock of liquid assets should enable the bank to endure the stress period until day 30, during which corrective actions can be taken.
COMPONENTS OF HIGH-QUALITY LIQUID ASSETS (HQLA)
According to the BASEL III guidelines, HQLA comprises assets that can be easily and readily converted into cash with minimal or no loss in value. These assets typically include cash and government securities (G-secs).
THE INTRODUCTION OF LCR AND ITS IMPLICATIONS
LCR was introduced as a prudential liquidity requirement under BASEL III, adding a parallel liquidity requirement to the existing Statutory Liquidity Ratio (SLR) mandated by the Reserve Bank of India (RBI). This created a situation where banks had to comply with two regulations that required the maintenance of similar liquid assets. Such compliance would significantly reduce the lending capacity of banks.
FACILITY TO AVAIL LIQUIDITY FOR LIQUIDITY COVERAGE RATIO (FALLCR)
To prevent an overlap in liquidity requirements that could hamper banks’ lending capacity, the RBI allows a portion of government securities used to fulfill the SLR to be recognized as HQLA Level 1 for calculating the LCR.
Assets Considered as Level 1 High-Quality Liquid Assets (HQLAs)
Under FALLCR, the assets recognized as Level 1 HQLAs for LCR calculation purposes include
1. Government securities in excess of the minimum SLR requirement.
2. G-secs within the mandatory SLR requirement, as permitted by the RBI under the Marginal Standing Facility and FALLCR.
THE SIGNIFICANCE OF FALLCR
FALLCR enables banks to pledge a portion of their G-secs held for SLR compliance to raise liquid assets that can be used to meet the LCR requirements under BASEL III. This means that when banks invest in G-secs, they not only fulfill their SLR obligations as specified by the RBI but can also leverage them to raise liquidity as HQLA to comply with the LCR requirements.
CONCLUSION
FALLCR, or Facility to Avail Liquidity for Liquidity Coverage Ratio, plays a crucial role in ensuring that banks can meet the liquidity requirements set by the LCR under BASEL III. By allowing a portion of government securities held for SLR compliance to be recognized as HQLA, FALLCR helps mitigate the potential negative impact on banks’ lending capacity. It provides banks with the flexibility to fulfil their regulatory obligations while maintaining the necessary liquidity buffers to withstand stress scenarios effectively.
FAQs
What is the purpose of FALLCR?
The purpose of FALLCR is to support banks in meeting the liquidity requirements set by the LCR. It allows banks to utilize a portion of government securities held for Statutory Liquidity Ratio (SLR) compliance as High-Quality Liquid Assets (HQLAs) for calculating the LCR.