liquidity coverage ratio
A Basel III standard requiring banks to hold enough high-quality liquid assets to survive a 30-day stress scenario of cash outflows.
Example
“Banks must maintain an LCR above 100% — holding more liquid assets than their 30-day stressed cash outflows.”
Memory Tip
LCR = can the bank survive 30 days of stress? Hold enough liquid assets to COVER potential runs.
Why It Matters
This ratio matters to everyday people because it determines whether banks can actually pay you if there is a financial crisis or bank run. When banks maintain strong liquidity coverage ratios, depositors can be more confident their money is safe and accessible during economic turmoil. Understanding this concept helps you evaluate the stability of financial institutions where you keep your savings.
Common Misconception
Many people think that having a liquidity coverage ratio above the minimum requirement means a bank is completely safe and will never fail. However, this ratio only measures how a bank handles a specific 30-day stress scenario and does not account for longer-term crises, other types of risks, or problems that develop over months or years.
In Practice
A large bank might need to maintain 100 million dollars in highly liquid assets to meet its liquidity coverage ratio requirement if it expects 90 million dollars in net cash outflows over 30 days during a crisis. If depositors suddenly withdraw 80 million dollars and the bank also loses 10 million in funding from other sources during a stressful period, the bank would still have enough liquid reserves to cover these outflows without selling less-liquid assets at fire-sale prices.
Etymology
LIQUIDITY (available cash) COVERAGE (protection against outflows) RATIO. Does LIQUID assets COVER potential outflows?
Common Misspellings
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Related Terms
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See Also
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