What is liquidity coverage ratio in simple terms?

The liquidity coverage ratio (LCR) refers to the proportion of highly liquid assets held by financial institutions, to ensure their ongoing ability to meet short-term obligations.

What does the liquidity coverage ratio do?

Put simply, the liquidity coverage ratio is a term that refers to the proportion of highly liquid assets held by financial institutions to ensure that they maintain an ongoing ability to meet their short-term obligations (i.e., cash outflows for 30 days).

What is good LCR?

Banks and financial institutions should attempt to achieve a liquidity coverage ratio of 3% or more. In most cases, banks will maintain a higher level of capital to give themselves more of a financial cushion.

What is LCR and NSFR?

These two requirements are intended to reduce risks in case of episodes of financial turbulence. To mitigate this risk, the LCR (Liquidity Coverage Ratio) and NSFR (Net Stable Funding Ratio) have been created, which are part of the Basel III agreements approved in January 2013 and October 2014, respectively.

What is minimum liquidity?

Minimum Liquidity means that the sum of (I) the aggregate amount of unrestricted cash and Cash Equivalents of the Qualified Loan Parties at such time plus (II) the Total Unutilized Revolving Credit Amount.

What does LCR stand for?


Acronym Definition
LCR Left – Center – Right (mnemonic for Inductance, Capacitance & Resistance)
LCR Least Cost Call Routing
LCR Landscape Component Repository
LCR Line Control Register

Why is LCR important?

The objective of the LCR is to promote the short-term resilience of the liquidity risk profile of banks. The crisis drove home the importance of liquidity to the proper functioning of financial markets and the banking sector. Prior to the crisis, asset markets were buoyant and funding was readily available at low cost.

How is RWA calculated?

Banks calculate risk-weighted assets by multiplying the exposure amount by the relevant risk weight for the type of loan or asset. A bank repeats this calculation for all of its loans and assets, and adds them together to calculate total credit risk-weighted assets.

What is a bad liquidity ratio?

A low liquidity ratio means a firm may struggle to pay short-term obligations. For a healthy business, a current ratio will generally fall between 1.5 and 3. If current liabilities exceed current assets (i.e., the current ratio is below 1), then the company may have problems meeting its short-term obligations.

How do you find minimum liquidity?