ERM Glossary: Liquidity Coverage Ratio
(LCR)
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The Liquidity Coverage Ratio is being introduced by Basel
III. It is designed to promote the short-term resilience of a bank’s liquidity
risk profile by ensuring that it has sufficient high-quality liquid assets to
survive a significant (liquidity) stress scenario lasting for one month.
Banks will be required to hold a stock of high-quality
liquid assets sufficient to meet expected net cash outflows over the next 30
calendar days. ‘High-quality’ here is designed to encompass assets that have
some fundamental characteristics (e.g. low credit and market risk, ease and
certainty of valuation, low correlation with risky assets), market-related
characteristics (e.g. active and sizeable market, low market concentration),
are unencumbered (e.g. not pledged explicitly or implicitly to secure or
collateralise other activities) and are practically able to be accessed for
liquidity management (e.g. are under the control of functions within the bank
charged with managing liquidity risk). The value to be placed on an asset in
this computation is set out in paragraphs 21 – 49 of the Basel III liquidity
proposals, i.e. BCBS
(2010a).
Details on how to calculate expected net cash outflows over
the next 30 calendar days are set out in paragraphs 50 – 118 of the Basel III
liquidity proposals, i.e. BCBS (2010a),
for a range of activities that a bank might undertake.
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