What is the Liquidity Coverage Ratio (LCR)?

The LCR is a global banking standard requiring financial institutions to hold a sufficient stock of high-quality liquid assets (HQLA) to cover their net cash outflows over a 30-day stressed period.

Why was the LCR introduced?

It was developed by the Basel Committee on Banking Supervision (BCBS) after the 2008 financial crisis to prevent liquidity crunches, enhance financial stability, and strengthen the global banking system's resilience.

What types of assets qualify as High-Quality Liquid Assets (HQLA) for LCR?

HQLA typically includes cash, central bank reserves, and certain high-rated sovereign bonds. These assets are easily convertible to cash with minimal loss of value, even in stressed market conditions.

How does the LCR impact banks and the broader economy?

The LCR requires banks to maintain larger liquidity buffers, which can influence their lending capacity but significantly enhances overall financial stability and public confidence in the banking sector's ability to withstand shocks.