The model analyses new lending on a marginal, stand-alone basis; it assumes that new lending is supported by new funding. It builds a complete balance-sheet of the proposed lending, the funding – both debt and equity – supporting it and the associated liquidity portfolio.
The model requires the firm to define four things –
- Asset terms
- Funding structure (both debt and equity)
- Liquidity portfolio
- Target LCR
The model then solves for the amount of liquidity that must be held to meet the desired LCR level during the life of the asset as well as the capital required to support that liquidity. In turn, this allows the economics of the proposed business to be comprehensively evaluated.