Liquidity Coverage Ratio (LCR)

During the 2008 financial crisis, several banks that had enough capital still ran into trouble because they could not raise cash quickly. The LCR, introduced under Basel III, aims to ensure banks can survive a short-term liquidity crisis.

High-quality liquid assets include cash, central bank reserves and government bonds that can easily be sold or used as collateral, even in stressed markets. Expected net outflows are calculated using assumptions about how much deposits and funding might be withdrawn in a crisis.

The ratio is calculated by dividing high-quality liquid assets by expected net cash outflows over 30 days, and must be at least 100%. For example, a bank with 120,000,000,000 of liquid assets and estimated stressed outflows of 100,000,000,000 has an LCR of 120%.

Banks are generally allowed to use their liquid assets during a crisis, falling below 100% temporarily. The LCR is complemented by the net stable funding ratio, which focuses on longer-term funding stability.