Liquidity Coverage Ratio – LCR
What is the ‘Liquidity Coverage Ratio – LCR’
The liquidity coverage ratio (LCR) refers to highly liquid assets held by financial institutions in order to meet short-term obligations. The Liquidity coverage ratio is designed to ensure that financial institutions have the necessary assets on hand to ride out short-term liquidity disruptions. Banks are required to hold an amount of highly-liquid assets, such as cash or Treasury bonds, equal to or greater than their net cash outflow over a 30 day period (having at least 100% coverage). The liquidity coverage ratio started to be regulated and measured in 2011, but the full 100% minimum wasn’t enforced until 2015.
BREAKING DOWN ‘Liquidity Coverage Ratio – LCR’
The liquidity coverage ratio is an important part of the Basel Accords, as they define how much liquid assets have to be held by financial institutions. Because banks are required to hold a certain level of highly-liquid assets, they are less able to lend out short-term debt.