The liquidity coverage ratio (LCR) is a measure of a bank or financial institution’s ability to meet its short-term funding requirements. It measures the amount of high-quality liquid assets held by banks and financial institutions relative to their net demand deposits and eligible liabilities (EDL). Net demand deposits are the total of all customer checking accounts, savings accounts, money market accounts, and other time deposits with original maturities of one year or less.

What is the liquidity coverage ratio? – LCR meaning in finance

LCR stands for liquidity coverage ratio. This is a liquidity ratio that measures a bank’s ability to meet its short-term financial obligations.

The LCR helps banks determine whether they have enough liquid assets to cover potential cash outflows in the short term. The formula is fairly simple, with only three variables:

  • Net stable funding requirement (NSFR)
  • Netting set size (NSS)
  • Required holding period under NSFR

How to calculate the liquidity coverage ratio using the LCR calculator?

The LCR calculator helps you to calculate the liquidity coverage ratio. The liquidity coverage ratio is used to measure a bank’s ability to withstand financial stress.

An institution that has a good level of liquidity can easily meet its obligations by accessing funds at short notice whenever it needs, while an institution with low levels of liquidity may struggle to do so in times of financial stress.

How to interpret LCR?

In order to interpret the LCR, it’s important to understand what liquidity means. Liquidity refers to a bank’s ability to meet its short-term funding needs by accessing cash or securities in the market, as well as its ability to continue operating in the event of a shock like a financial crisis.

The LCR is calculated by dividing total liquid assets by total net stable funding outflows (NSF) over 30 days. An institution’s NSF are defined as its expected minimum cash outflows that would arise under normal market conditions over 30 calendar days.

Liquid assets include assets that can easily be converted into cash within one day without incurring significant losses, such as common stock; Treasury securities; and other highly liquid government-backed debt issued by Fannie Mae and Freddie Mac (if applicable). To qualify for inclusion under this category:

  • The issuer must have no maturity date
  • The issuer must not be subordinated to other claims except in certain specified circumstances; these are detailed in Appendix 2 of Basel II Liquidity Requirements: A Practical Guide.

FAQ

What does LCR mean?

Liquidity Coverage Ratio (LCR) refers to the number of liquid assets banks are required to keep as coverage in order to have sufficient reserves on hand in the event of a financial crisis.

Why is LCR important?

The LCR is designed to ensure that banks hold a sufficient reserve of high-quality liquid assets (HQLA) to allow them to survive a period of significant liquidity stress lasting 30 calendar days.

What is the CRR rate?

The cash reserve ratio (CRR) is the percentage of a bank’s total deposits that it needs to maintain as liquid cash.