What Is the Liquidity Coverage Ratio – LCR?

The liquidity coverage ratio (LCR) refers to the proportion of highly liquid assets
held by financial institutions, to ensure their ongoing ability to meet short-term
obligations. This ratio is essentially a generic stress test that aims to anticipate
market-wide shocks and make sure that financial institutions possess suitable
capital preservation, to ride out any short-term liquidity disruptions, that may
plague the market.

Liquidity Coverage Ratio

LCR Formula and Calculation

LCR=High quality liquid asset amount (HQLA)Total net cash flow amo
untLCR = \frac{\text{High quality liquid asset amount (HQLA)}}{\
text{Total net cash flow
amount}}LCR=Total net cash flow amountHigh quality liquid asset amount (HQLA)
1.The LCR is calculated by dividing a bank's high-quality liquid assets by its
total net cash flows, over a 30-day stress period.
2.The high-quality liquid assets include only those with a high potential to be
converted easily and quickly into cash.
3.The three categories of liquid assets with decreasing levels of quality are
level 1, level 2A, and level 2B.

KEY TAKEAWAYS

 LCR is a requirement under Basel III whereby banks are required to hold
an amount of high-quality liquid assets that's enough to fund cash outflows
for 30 days.1
 The LCR is a stress test that aims to anticipate market-wide shocks and
make sure that financial institutions possess suitable capital preservation
to ride out any short-term liquidity disruptions.
 Of course, we won't know until the next financial crisis if the LCR provides
enough of a financial cushion for banks or if it's insufficient.

The net stable funding ratio has been proposed within Basel III, the new set of capital and liquidity
requirements for banks, which will over time replace Basel II. Basel III has been prepared within the
[2]

Basel Committee on Banking Supervision of the Bank for International Settlements. Various
[3]

components of Basel III are being implemented in different jurisdictions and Basel committee reports
progress on the state of implementation through its Regulatory Consistency Assessment
Programme ("RCAP") which is published on a semi-annual basis.
Net Stable Funding ratio seeks to calculate the proportion of Available Stable Funding ("ASF") via
the liabilities over Required Stable Funding ("RSF") for the assets.
 Sources of Available Stable funding includes: customer deposits, long-term wholesale funding
(from the interbank lending market), and equity.
 "Stable funding" excludes short-term wholesale funding (also from the interbank lending market).
These components of stable funding are not equally weighted: see page 21 and 22 of the
Consultative Document dated December 2009 for the detailed weights. [4]

Some of the weights for longer term or "structural term assets" are as follows(these are outdated pls
refer to latest BIS paper of 2014)

 100% of loans longer than one year;

 85% of loans to retail clients with a remaining life shorter than one year;
 50% of loans to corporate clients with a remaining life shorter than one year;
 20% of government and corporate bonds.
 Off-balance sheet categories
The consultative document will be amended. [5]