Liquidity Coverage Ratio
The Liquidity Coverage Ratio (LCR) requires large banks to hold sufficient high-quality liquid assets (HQLA) to cover projected net cash outflows over a 30-day stress scenario, ensuring banks can survive short-term funding disruptions without central bank support.
The LCR was introduced under Basel III in response to the acute short-term funding crises that struck banks during the 2008 financial crisis, when repo markets froze, money market funds broke the buck, and banks that relied on overnight or short-term wholesale funding could not roll those obligations. The LCR forces banks to maintain a buffer of liquid assets against their most plausible near-term funding risk.
High-Quality Liquid Assets (HQLA) are divided into Level 1 (cash, central bank reserves, and sovereign bonds with 0% Basel risk weight — counted at full value) and Level 2 assets (highly rated sovereign bonds, GSE securities, and certain corporate bonds and equities — counted at haircuts of 15-50%). US Treasury securities, reserves at the Federal Reserve, and agency MBS are the dominant HQLA components at US banks.
The net cash outflow calculation subjects different liability types to different assumed runoff rates over the 30-day stress window. Retail deposits with FDIC insurance are assumed to run off at 3-10%; uninsured retail deposits at higher rates; wholesale funding and corporate deposits at 25-100% depending on the counterparty and relationship type. Off-balance-sheet commitments such as credit card lines and revolving credit facilities also contribute to assumed outflows.
The required minimum LCR in the US is 100% for large bank holding companies (those with $250 billion or more in assets). Banks must report the LCR to regulators monthly and publicly disclose it quarterly. The failure of Silicon Valley Bank in March 2023 — which held assets largely in Treasuries and agency bonds but was not subject to the LCR requirement due to its asset size (between $100-$250 billion) — prompted regulatory reconsideration of the applicability thresholds.
For equity investors, LCR levels influence how much HQLA a bank is required to hold in lower-yielding liquid assets rather than higher-yielding loans, directly affecting net interest margin. Banks with large, stable retail deposit bases naturally run high LCRs with less incremental management burden than banks reliant on wholesale funding.