A liquidity measure/ liquidity buffer (liquidity-related tool) that reflects a bank’s ability to manage its liquidity to meet its customers’ needs (customers’ access to their deposited funds). A bank’s liquidity can be defined in its broader ability to generate or secure liquidity – including through access to central bank facilities. It is also affected by the stability of a bank’s funding profile, and the factors that drive change in the ratio.
The liquidity coverage ratio (LCR) is calculated by dividing a bank’s most liquid assets by its total net cash flows (outflows), over a 30-day stress period. It is given by the following formula:
LCR= stock of HQLA ÷ net outflows
Where: LCR ≥ 100%
The most liquid assets (high-quality liquid assets, HQLAs) are those that can be converted easily and quickly into cash or monetary assets. Net outflows are those that are expected to arise over the next 30 calendar days.
The LCR is designed to ensure that banks hold a sufficient reserve of high-quality liquid assets (HQLAs) whereby it can survive a period of significant liquidity stress over a period of 30 calendar days.
The period of stress is determined by regulatory and supervisory authorities combining elements of bank-specific liquidity and market-wide stress. The 30-calendar-day stress period is the shortest period during which corrective action can be taken by the bank’s management or by supervisors.
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