/

ERM Glossary: Liquidity Coverage Ratio (LCR)

[this page | pdf | references | back links]

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.

 


NAVIGATION LINKS
Contents | Prev | Next


Desktop view | Switch to Mobile