{"id":31687,"date":"2023-10-17T12:19:06","date_gmt":"2023-10-17T12:19:06","guid":{"rendered":"https:\/\/swoopfunding.com\/au\/?post_type=business-glossary&#038;p=31687"},"modified":"2025-04-24T14:14:57","modified_gmt":"2025-04-24T14:14:57","slug":"liquidity-coverage-ratio","status":"publish","type":"business-glossary","link":"https:\/\/swoopfunding.com\/au\/business-glossary\/liquidity-coverage-ratio\/","title":{"rendered":"Liquidity coverage ratio (LCR)"},"content":{"rendered":"<h3>Definition<\/h3>\n<p><span style=\"font-weight: 400;\">The liquidity coverage ratio (LCR) is a financial metric used in the banking industry to assess a bank&#8217;s short-term liquidity risk. <\/span><\/p>\n<h3>What is a liquidity coverage ratio?<\/h3>\n<p><span style=\"font-weight: 400;\">A liquidity coverage ratio measures the adequacy of a bank&#8217;s liquid assets to cover its potential net cash outflows over a 30-day period under stressed conditions.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The liquidity coverage ratio is calculated as follows:<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Liquidity coverage ratio = (high?quality liquid assets \/ net cash outflows) x 100<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The LCR serves as a safeguard to ensure that a bank has sufficient liquid assets to cover its short-term cash outflows in case of a severe financial or economic stress event. This reduces the risk of a bank facing a liquidity crisis.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">As per standards, banks are required to maintain a minimum LCR of 100%, meaning that they should hold enough high-quality liquid assets to cover their net cash outflows over a 30-day stress period.<\/span><\/p>\n<h3>Example of liquidity coverage ratio<\/h3>\n<p>Let&#8217;s say Bank XYZ has the following:<\/p>\n<ul>\n<li>High-quality liquid assets worth $100 million<\/li>\n<li>Net cash outflows over the next 30 days amounting to $80 million<\/li>\n<\/ul>\n<p>Using these numbers, we can calculate the Liquidity Coverage Ratio:<span class=\"math math-inline\"><span class=\"katex\"><span class=\"katex-html\" aria-hidden=\"true\"><span class=\"base\"><span class=\"mord\"><span class=\"mfrac\"><span class=\"vlist-t vlist-t2\"><span class=\"vlist-r\"><span class=\"vlist-s\">?<\/span><\/span><\/span><\/span><\/span><\/span><\/span><\/span><\/span><\/p>\n<p><span class=\"math math-inline\"><span class=\"katex\"><span class=\"katex-mathml\">LCR = $100 million \/ $80<\/span><span class=\"katex-html\" aria-hidden=\"true\"><span class=\"base\"><span class=\"mord\"><span class=\"mfrac\"><span class=\"vlist-t vlist-t2\"><span class=\"vlist-r\"><span class=\"vlist\"><span class=\"mspace\">\u00a0<\/span><span class=\"mord mathnormal\">mi<\/span><span class=\"mord mathnormal\">ll<\/span><span class=\"mord mathnormal\">i<\/span><span class=\"mord mathnormal\">o<\/span><span class=\"mord mathnormal\">n = 1.25<\/span><\/span><span class=\"vlist-s\">?<\/span><\/span><\/span><\/span><\/span><\/span><\/span><\/span><\/span><\/p>\n<p>In this example, Bank XYZ has an LCR of 1.25, indicating that it holds 125% of its net cash outflows in high-quality liquid assets, which meets the regulatory requirement. This means the bank has sufficient liquidity to cover its short-term obligations over the next 30 days, providing a buffer against potential liquidity stress.<\/p>\n","protected":false},"author":1,"template":"","class_list":["post-31687","business-glossary","type-business-glossary","status-publish","hentry"],"acf":[],"featured_image_urls_v2":{"full":"","thumbnail":"","medium":"","medium_large":"","large":"","1536x1536":"","2048x2048":"","image_blog":"","image_blog_full":"","image_podcast":"","image_banking":"","image_blog_internal":"","image_blog_medium":"","image_single_banking":""},"post_excerpt_stackable_v2":"<p>Definition The liquidity coverage ratio (LCR) is a financial metric used in the banking industry to assess a bank&#8217;s short-term liquidity risk. What is a liquidity coverage ratio? A liquidity coverage ratio measures the adequacy of a bank&#8217;s liquid assets to cover its potential net cash outflows over a 30-day period under stressed conditions.\u00a0 The liquidity coverage ratio is calculated as follows: Liquidity coverage ratio = (high?quality liquid assets \/ net cash outflows) x 100 The LCR serves as a safeguard to ensure that a bank has sufficient liquid assets to cover its short-term cash outflows in case of a&hellip;<\/p>\n","category_list_v2":"","author_info_v2":{"name":"root","url":"https:\/\/swoopfunding.com\/au\/author\/root\/"},"comments_num_v2":"0 comments","_links":{"self":[{"href":"https:\/\/swoopfunding.com\/au\/wp-json\/wp\/v2\/business-glossary\/31687","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/swoopfunding.com\/au\/wp-json\/wp\/v2\/business-glossary"}],"about":[{"href":"https:\/\/swoopfunding.com\/au\/wp-json\/wp\/v2\/types\/business-glossary"}],"author":[{"embeddable":true,"href":"https:\/\/swoopfunding.com\/au\/wp-json\/wp\/v2\/users\/1"}],"wp:attachment":[{"href":"https:\/\/swoopfunding.com\/au\/wp-json\/wp\/v2\/media?parent=31687"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}