LCR (Liquidity Coverage Ratio)

What it is

The Liquidity Coverage Ratio (LCR) is a Basel III short-term liquidity standard. It compares a bank’s stock of high-quality liquid assets (HQLA) with the net cash outflows it would face over 30 calendar days of combined idiosyncratic and market-wide stress.

LCR = HQLA / net cash outflows over 30 days, and it must be at least 100%.

HQLA come in three levels. Level 1 (central bank reserves, most high-quality government bonds) count in full. Level 2A assets take at least a 15% haircut. Level 2B assets take larger haircuts. Level 2 assets are capped at 40% of the buffer, and Level 2B at 15%.

Outflows apply run-off rates to each liability: for example 5% on stable retail deposits and higher rates on operational and non-operational wholesale funding. Inflows are capped at 75% of outflows, so a bank always holds some HQLA.

Why it matters

The LCR was introduced after banks with adequate capital failed for lack of cash in 2008. It makes the bank self-sufficient for a month of stress, giving time for management and authorities to act. Supervisors watch it monthly, markets read it in Pillar 3, and it shapes product pricing: deposits with low run-off rates are worth more to a bank than flighty wholesale funding.

Worked example

Illustrative numbers.

• Level 1 assets: 1,000 million euro. Level 2A assets: 353 million before haircut, 300 million after the 15% haircut. HQLA: 1,300 million.
• Stressed outflows over 30 days: 1,500 million.
• Stressed inflows: 400 million. The cap is 75% of 1,500 = 1,125 million, so all 400 count.
• Net outflows: 1,500 minus 400 = 1,100 million.
• LCR: 1,300 / 1,100 = 118%.

If a corporate client moves 200 million of non-operational deposits (40% run-off) into the bank, outflows rise by 80 million. Placing the cash at the central bank adds 200 million of Level 1, and the LCR rises to 1,500 / 1,180 = 127%.

Who uses it

• Liquidity reporting analysts compute the ratio and file the monthly LCR templates.
• Liquidity risk analysts monitor intraday and daily drivers and run internal stress tests beyond the regulatory one.
• ALM and treasury analysts manage the HQLA portfolio and the funding mix.
• Treasury operations analysts ensure buffer assets stay unencumbered and can be monetised.
• Regulatory consultants assess the impact of rule changes and data gaps.

Common confusions

• The LCR covers 30 days. The Net Stable Funding Ratio (NSFR) covers structural funding over one year.
• HQLA must be unencumbered. A bond pledged as collateral does not count, even if it is Level 1.
• Run-off rates are regulatory assumptions. They are not forecasts of client behaviour.
• A high LCR does not remove intraday liquidity risk or concentration risk, which are monitored separately, for example through ALMM templates.