1. What Is the Liquidity Coverage Ratio (LCR)?

The Liquidity Coverage Ratio (LCR) is a key financial metric that measures a bank's ability to meet its short-term obligations under stress scenarios. It compares a bank's high-quality liquid assets (HQLA) to its total net cash outflows over a 30-day stress period.

2. How Is LCR Calculated?

The LCR is calculated using the following formula:

Where:

• HQLA — High-quality liquid assets that can be easily converted to cash
• Total Net Cash Outflows — Expected cash outflows minus expected cash inflows over 30 days

Explanation: The ratio shows how many days a bank can survive a liquidity stress scenario using just its liquid assets.

3. Importance of LCR

Details: Regulatory requirements typically mandate an LCR of at least 100%, meaning banks must hold enough liquid assets to cover net outflows for 30 days. This ensures financial stability during periods of stress.

4. Using the Calculator

Tips: Enter the total value of HQLA and the estimated net cash outflows over 30 days. Both values must be positive numbers in the same currency.

5. Frequently Asked Questions (FAQ)

Q1: What qualifies as HQLA?
A: HQLA includes cash, central bank reserves, and marketable securities that can be easily liquidated without significant loss of value.

Q2: What's considered a good LCR?
A: Regulatory minimum is typically 100%, but higher ratios (110-120%) indicate stronger liquidity positions.

Q3: How often should LCR be calculated?
A: Banks typically calculate LCR daily for regulatory reporting, while other institutions might calculate it monthly.

Q4: What are the limitations of LCR?
A: LCR only covers 30-day scenarios and doesn't account for longer-term liquidity risks or all potential stress factors.

Q5: How does LCR differ from NSFR?
A: While LCR focuses on short-term (30-day) liquidity, the Net Stable Funding Ratio (NSFR) assesses longer-term (1-year) funding stability.