Liquidity Coverage Ratio [LCR]

The Liquidity Coverage Ratio (LCR) is a Basel III requirement ensuring banks hold sufficient high-quality liquid assets (HQLA) to survive a 30-day stressed funding scenario. Banks must maintain LCR of at least 100%, meaning liquid assets equal or exceed projected net cash outflows over 30 days. For example, if a bank expects $10 billion in outflows during stress (considering deposit runs, credit line drawdowns), it needs $10 billion in HQLA. Qualifying assets include cash, central bank reserves, and government securities (Level 1), with haircuts for less liquid assets like corporate bonds (Level 2A) and equities (Level 2B). The stress scenario assumes partial deposit withdrawals (3-10% for stable deposits, 40% for less stable), funding market closure, and credit downgrades. LCR addresses liquidity risk exposed during the 2008 crisis when banks like Northern Rock failed despite being solvent. Implementation began in 2015 at 60%, reaching 100% by 2019. Critics argue LCR reduces profitability and may create systemic risk if all banks sell assets simultaneously during stress.