For the first time in almost three years, all of Canada’s ‘big five’ banks recorded drops in their liquidity coverage ratios (LCRs) for the quarter ending April 2024.

TD Bank experienced the most significant decline, with its LCR falling seven percentage points to 126%, marking the lowest level since July 2022. Canadian Imperial Bank of Commerce (CIBC) saw a 6pp decline to 129%, its lowest in a year.

Royal Bank of Canada reported an LCR of 128%, following a 4pp drop. Bank of Montreal and Scotiabank recorded declines of 2pp and 1pp respectively, to 128% and 129%.

TD Bank’s LCR decrease was due to both a reduction in high-quality liquid assets (HQLAs) – the ratio’s numerator – which fell by C$1.7 billion ($1.2 billion) to C$332.7 billion, and an increase in net cash outflows (NCOs) – the ratio’s denominator – which jumped by C$13.6 billion to C$265 billion.

The spike in NCOs was driven primarily by a 20.5% surge in outflows stemming from secured wholesale funding, reaching C$46.3 billion, the highest since records began in 2017. Additionally, cash inflows declined by almost 7% to C$111.9 billion, led by lower balances in the residual category of other cash inflows, which includes derivatives cash inflows and other contractual cash inflows, down 10.1%, and from secured lending, which dropped 9.8%.

CIBC exhibited a similar trend, with secured wholesale funding outflows rising 19.8% to a record high of C$18.2 billion and unsecured wholesale funding outflows up 2.8% to C$120.1 billion, while cash inflows related to secured lending dropped 19.3% to C$23.4 billion.

What is it?

The liquidity coverage ratio is one of two liquidity ratios introduced by the Basel Committee on Banking Supervision (BCBS) in the wake of the financial crisis, the other being the net stable funding ratio. It is designed to improve the banking sector’s ability to absorb financial and economic shocks.

The LCR requires banks to maintain a sufficient stock of HQLAs to cover projected net cash outflows over a 30-day period of stress. Banks are required to maintain this ratio at a 100% minimum.

Under the BCBS’s disclosure standards, secured wholesale funding is defined as all collateralised liabilities and general obligations, including assets sold under repo agreements. Secured lending encompasses maturing reverse repos and securities borrowing agreements.

Why it matters

The latest increase in CIBC and TD Bank’s projected net cash outflows were driven largely by a rise in outflows from secured wholesale funding and lower inflows from secured lending. These two trends combined to push down the bank’s ratios.

CIBC identified funding nearing maturity as the primary cause of its NCO increase.

Both banks have seen a steady rise in secured wholesale funding outflows since public disclosures began in 2017. Since then, their share has increased from 3.2% to 9.1% of CIBC’s total cash outflows. Similarly, at TD Bank, their share has grown from 4.2% to 12.3% over the same period.

Currently, neither bank is on the verge of a liquidity shortfall, and both remain well above the minimum requirement. However, maintaining a healthy LCR can be challenging. If this trend continues and their stock of HQLAs do not keep pace with rising cash outflows, it could exert further downward pressure on their ratios.

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