Spreadsheet: 466643d1466362883-xlsx-to-xml-lcr_return
Sheet: Operational_Deposits

 | Determination of Operational vs. Non-operational Deposit Balances
 | The following outlines additional guidance to assist institutions with distinguishing between operating and non-operating deposit balances under the LAR Guideline.  This guidance will form the basis of OSFI's review of institutions' methodologies for identifying operational deposit balances.  Institutions that choose to deviate from this guidance must prove to OSFI that their methodologies are also consistent with the intent of the requirements outlined in the LAR Guideline.
 | Chapter 2 of the LAR Guideline defines operational balances using three primary criteria: - whether the deposits are used for qualifying activities (paragraphs 73-74); - whether the deposits are priced to give economic incentive to the customer to leave excess balances (paragraph 75); and, - whether the balance is proven required to serve a customer's operational needs (paragraph 76).
 | Once operational and non-operational balances are identified, LCR run-off factors are assigned based on insurance and counterparty profiles per the following table:
 |  |  | Operational |  | Non-operational
 |  |  | Fully insured | Other | Fully insured | Other
 | Deposit provided by:
 | Non-financial corporate |  | 0.03 | 0.25 | 0.2 | 0.4
 | Sovereigns, central banks, PSEs, MDBs |  | 0.03 | 0.25 | 0.2 | 0.4
 | Banks, other FIs and other legal entities |  | 0.03 | 0.25 | 1 | 1
 | Operational
 | The following deposit types are subject to analysis to determine operational balances: (a) demand deposits (interest bearing and non-interest bearing) and (b) term deposits with original term-to-maturity of less than or equal to 30 days.  OSFI recognizes that in the Canadian deposit market, less than or equal to 30 day wholesale term deposits are priced and managed as an alternative to demand deposits and are generally used as a cash management tool by wholesale customers. Additional criteria, outlined below and in Chapter 2 of the LAR Guideline must also be met for deposit balances to be considered operational.
 | Potential operational deposit balances are determined from deposit accounts with "qualifying activities", of which: - balances that are priced to pay at or below market rate, and are held for operational uses; and,  - balances that are priced to pay above market rate, but are "actively" used for qualifying activities (i.e. not excess balances).
 | The criteria related to "qualifying activities" (Chapter 2, paragraphs 73-74) is the starting point for determination of operational balances - i.e. only accounts with cash management, clearing, custody service arrangement are selected for further analysis in the subsequent steps.
 | The criteria related to "economic incentive" (Chapter 2, paragraph 75) is represented in the assessment process as account pricing compared to the market rate.   In Canada, the appropriate market rate would be the Bank of Canada overnight rate.
 | By definition, accounts priced at or below market rate offer minimum incentive to wholesale customers to hold balances in these accounts for yield purpose. In addition, OSFI recognizes that Canadian banks typically offer bundled accounts to wholesale customers for maximum value proposition (e.g. a customer can have both non- or low-interest bearing and high-interest bearing accounts and freely transfer funds between them depending on account features they need to access at any given point). There is little barrier for a wholesale customer to transfer funds out of non- or low-interest bearing accounts unless he/she has to leave funds there to conduct operational activities.  It would thus be reasonable to assume that deposit balances in accounts paying at or below market rate should have a very high "operational" component and practically "nil" excess balance by default.
 | The criteria related to account usage (Chapter 2, paragraph 76), is captured in the analysis of (a) operational use for accounts paying at- or below-market rate; and (b) operational use for accounts paying above-market rate, whereby excess balances are 'carved out.'  - For (a), a simplified bank assessment should be sufficient due to highly operational nature of the accounts. One approach could be to examine whether a client has the ability to transfer balances from at-or below-market rate paying accounts to above-market rating paying accounts. If he/she does, it is logically to assume that he/she has already swept all excess balances to the above market rate-paying alternative and the balances remaining in the at- or below-market rate paying accounts are held only for operational purposes.  - For (b), approach to assessing "excess balance" is outlined below.
 | Non-operational
 | Accounts and balances that fall out of the determination steps outlined above will be considered "non-operational" including: - demand and term (with original term-to-maturity of less than or equal to 30 days) deposit accounts with "qualifying activities" but accounts are priced above-market rate, with a portion of balance that is not actively used for qualifying activities ("excess balance" - see proposed approach below) - deposit accounts without "qualifying activities" which are: i) remaining demand and term (with original term-to-maturity of less than or equal to 30 days) deposit balances; and ii) term deposits with original term-to-maturity of greater than 30 days. Note that longer-term deposits are investment vehicles and would not be considered as qualifying activities because they are used to manage excess funds.
 | Possible Approach to Assessing "Excess Balance"
 | As Chapter 2, paragraph 76, if banks are unable to determine excess balance, the entire deposits will be assumed excess and thus non-operational.
 | The excess balance is, by definition, balances that are not required for qualifying activities - i.e. it can be assumed that the non-volatile portion of the account balance, due to lack of use, should be considered excess.
 | Thus, to estimate excess balance, banks could establish a minimum threshold either based on a notional amount, or a percentage based on average / minimum balance.  To calculate a percentage, banks could: 1) Observe at the client / account level, the minimum and average balance in the month (e.g. 12 months'  history could be used to account for balance account seasonality and usage patterns).  The minimum balance will be interpreted as excess balance, such that the difference between the minimum and average balances represents the balance actively engaged in qualifying activities used to determine the ratio.  2) Take the ratio of minimum to average balance and apply it to the current-month demand balance with qualifying activities that pay above market rates for LCR reporting. Note that this assessment should be refreshed at least annually.
 | Banks are permitted flexibility to customize the assessment to reflect their data and business configurations; however, per Chapter 2, paragraph 73, this assessment will be reviewed by OSFI.