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A regulatory measure called the Liquidity Coverage Ratio (LCR) is intended to make sure that banks have enough liquidity to cover their short-term funding requirements in the case of a liquidity crisis scenario.
The global financial crisis of 2008, which highlighted the significance of having appropriate liquidity buffers to withstand times of market stress, led to the introduction of the LCR, a component of the Basel III framework.
A bank's forecasted net cash outflows over a 30-day stress period are subtracted from its High-Quality Liquid Assets (HQLA), which are used to compute the LCR. HQLAs are assets that can be swiftly and readily converted into cash without requiring major price reductions, such as cash, reserves at the central bank, and top-notch corporate and government bonds.
Each jurisdiction has a different LCR requirement, which is determined by regulators. For instance, in the US, the Federal Reserve mandates that big banks maintain an LCR of at least 100%, i.e., they must hold enough HQLAs to cover their anticipated net cash withdrawals throughout a 30-day stress period. The LCR threshold is set at 90% in other legal systems, like the European Union.
The LCR is a crucial indicator of how well a bank manages its liquidity risk and is intended to make sure that banks have enough liquidity to cover their short-term funding requirements in the event of a market stress scenario. Regulators want to lessen the possibility that a bank will have to sell assets at fire sale prices in order to fulfill funding demands, which might worsen market stress and result in systemic risk, by mandating banks to keep a buffer of HQLAs.
A bank's forecasted net cash outflows over a 30-day stress period are subtracted from its High-Quality Liquid Assets (HQLA), which are used to compute the LCR. HQLAs are assets that can be swiftly and readily converted into cash without requiring major price reductions, such as cash, reserves at the central bank, and top-notch corporate and government bonds.
Each jurisdiction has a different LCR requirement, which is determined by regulators. For instance, in the US, the Federal Reserve mandates that big banks maintain an LCR of at least 100%, i.e., they must hold enough HQLAs to cover their anticipated net cash withdrawals throughout a 30-day stress period. The LCR threshold is set at 90% in other legal systems, like the European Union.
The LCR is a crucial indicator of how well a bank manages its liquidity risk and is intended to make sure that banks have enough liquidity to cover their short-term funding requirements in the event of a market stress scenario. Regulators want to lessen the possibility that a bank will have to sell assets at fire sale prices in order to fulfill funding demands, which might worsen market stress and result in systemic risk, by mandating banks to keep a buffer of HQLAs.
