What Is the Liquidity Coverage Ratio (LCR)? Definition and Calculation

Search Fintrev

Search our guides, reviews and glossary.

The liquidity coverage ratio (LCR) is a Basel III banking standard that requires a bank to hold enough high-quality liquid assets (HQLA) to cover its total net cash outflows over a 30-day stress scenario. The ratio is HQLA divided by those projected net outflows, with a regulatory minimum of 100%. A bank at or above 100% can survive a month of heavy withdrawals and lost funding without fire-selling loans or relying on emergency central bank support.

What the LCR Measures

The Basel Committee on Banking Supervision introduced the LCR after the 2008 financial crisis. During that crisis, firms such as Bear Stearns and Lehman Brothers ran into trouble largely because they ran out of cash. Short-term funding markets froze and counterparties pulled money faster than assets could be sold, even at firms that had looked adequately capitalized.

The Basel Committee first set out the standard in December 2010 and revised it in January 2013. It was phased in from a 60% minimum in 2015, rising 10 percentage points a year to 100% in 2019. The Office of the Comptroller of the Currency, the Federal Reserve and the FDIC finalized the U.S. rule in 2014 on a faster phase-in schedule.

The 30-day window reflects how crises tend to unfold. A bank that stays liquid for about a month gives management and authorities time to respond through asset sales, recapitalization or an orderly resolution.

The LCR Formula

LCR = Stock of high-quality liquid assets ÷ Total net cash outflows over the next 30 calendar days ≥ 100%

High-quality liquid assets (HQLA)

HQLA are assets that can be converted to cash quickly and with little loss of value, even in stressed markets. To count, they must be unencumbered, meaning they are not already pledged as collateral, and they must be under the control of the bank’s liquidity management function. The three levels are:

• Level 1: cash, central bank reserves that can be drawn down in stress, and qualifying sovereign and central bank securities (U.S. Treasuries, for example). They count at full market value with no haircut and no cap.
• Level 2A: assets such as certain agency and government-sector securities and high-rated corporate bonds and covered bonds. They take a 15% haircut.
• Level 2B: lower-rated corporate debt, certain residential mortgage-backed securities and qualifying equities. Haircuts run 25% to 50%, so only 50% to 75% of their value counts.

Basel also caps the composition. Level 2 assets combined can make up no more than 40% of the HQLA stock, and Level 2B no more than 15%. The caps stop a bank from meeting the requirement mostly with assets that might sell poorly in a crisis.

Loans, including long-term loans and mortgages held on the balance sheet, are not HQLA. Real estate and most bank-issued securities are excluded as well. Some mortgage-backed securities can qualify as Level 2B, but a pool of whole loans cannot.

Total net cash outflows

The denominator is expected outflows minus expected inflows over 30 days. Both come from regulatory stress assumptions:

• Outflows equal each liability or commitment balance multiplied by a run-off rate. Under the Basel framework, stable insured retail deposits generally carry a 5% rate (3% in some jurisdictions that meet extra conditions), and less stable retail deposits carry 10% or more. Operational deposits from corporate clients are set at 25%, non-operational corporate deposits at 40%, and unsecured wholesale funding from financial institutions at up to 100%. Undrawn credit and liquidity facilities, derivative collateral calls and maturing secured funding add further outflows.
• Inflows are contractual receipts due within 30 days from performing exposures, adjusted by inflow rates.
• Inflow cap: inflows can offset no more than 75% of total outflows. Net outflows therefore never fall below 25% of gross outflows, so a bank always needs some HQLA regardless of its expected receipts.

Written out: Net cash outflows = Outflows − min(Inflows, 0.75 × Outflows).

Worked Example (Hypothetical)

Illustrative figures for a fictional bank using standard Basel parameters.

Step 1: HQLA after haircuts

• Level 1 (reserves and Treasuries): $60 billion → $60 billion
• Level 2A: $20 billion × (1 − 0.15) → $17 billion
• Level 2B (equities, 50% haircut): $10 billion × 0.50 → $5 billion
• HQLA = $82 billion. Level 2 is $22 billion (about 27% of HQLA) and Level 2B is $5 billion (about 6%), so both caps are satisfied.

Step 2: Stressed outflows

• Stable retail deposits: $200 billion × 5% = $10 billion
• Less stable retail deposits: $120 billion × 10% = $12 billion
• Operational corporate deposits: $40 billion × 25% = $10 billion
• Non-operational corporate deposits: $60 billion × 40% = $24 billion
• Undrawn committed credit lines to corporates: $140 billion × 10% = $14 billion
• Total outflows = $70 billion

Step 3: Inflows and the cap

Contractual inflows due within 30 days are $20 billion. The cap is 75% × $70 billion = $52.5 billion, so the full $20 billion counts.

Net outflows = $70 billion − $20 billion = $50 billion

Step 4: Ratio

LCR = $82 billion ÷ $50 billion = 164%, comfortably above the 100% minimum.

Suppose instead that inflows were $60 billion. Only $52.5 billion would count, net outflows would be $17.5 billion, and the LCR would be about 469%.

The deposit mix also matters. If $50 billion of the stable retail deposits were reclassified as non-operational corporate deposits, outflows would rise by $17.5 billion ($50 billion × 35 percentage points). The bank would need more HQLA to hold the same ratio even though total deposits had not changed.

How the LCR Is Used

Supervision. Banks calculate the LCR themselves and report it to their supervisor. The largest U.S. institutions calculate it every business day. Falling below 100% in normal conditions triggers supervisory follow-up, usually a remediation plan. The Basel framework states that HQLA is meant to be used during actual stress, so a bank can dip below 100% in a crisis.

Public disclosure. Basel requires banks within its scope to disclose their LCR, typically as a quarterly average, in regulatory (Pillar 3) reports. Large U.S. banks publish quarterly LCR disclosures. Investors can read the reported figure and its HQLA and outflow breakdowns. The composition tells them more than the headline number: how much of the HQLA is Level 1, which funding sources drive outflows, and whether the ratio is trending down.

Scope in the United States. The 2019 tailoring rule, adopted after the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018, sorted banks into categories by size and risk:

• Banks with $700 billion or more in assets, or $75 billion or more in cross-border activity, remain subject to the full LCR.
• Banks with $250 billion to $700 billion in assets face the full or a reduced requirement, depending on their reliance on short-term wholesale funding.
• Banks with $100 billion to $250 billion in assets face a reduced LCR only if their short-term wholesale funding is significant. The rest are exempt.

The rule cut compliance costs for midsize banks. Critics questioned it after Silicon Valley Bank failed in 2023, arguing that stricter pre-2019 liquidity rules would have required the bank to hold more liquid assets.

Other jurisdictions. Basel member countries implement the LCR through national rules. The Reserve Bank of India applies it to banks and has extended a version to larger non-bank financial companies (NBFCs). National rules can differ in run-off rates, eligible assets and scope.

Limitations of the LCR

• Stress assumptions may be too mild. Run-off rates are calibrated estimates. Economist Laurence Ball has argued that they understate likely deposit withdrawals, the loss of short-term interbank funding and derivative collateral calls, which could leave large banks short of cash even while they comply. The 2023 runs showed that uninsured deposits can leave within days.
• HQLA values move with markets. Securities count at market value, so rising interest rates lower the value of bond holdings. Selling securities classified as held to maturity can force losses into the open and damage confidence.
• One horizon only. The ratio says nothing about intraday liquidity or funding gaps beyond day 30. A bank can show a healthy LCR while relying on funding that matures on day 31.
• Aggregation hides detail. A single ratio can mask currency mismatches or concentrations in particular funding sources.
• Opportunity cost and incentives. Treasuries and reserves earn less than loans, so banks push back on stricter rules. They may also avoid dipping below 100% during stress for fear of how markets will read it, which weakens the buffer’s usability.

LCR vs. Related Measures

LCR vs. NSFR. The net stable funding ratio, also a Basel III standard, divides available stable funding by required stable funding and must be at least 100%. The LCR covers a 30-day acute stress. The NSFR looks at funding structure over one year. A bank with a high LCR but a low NSFR holds plenty of liquid assets today but funds long-dated assets with short-term money, so it would have to keep rolling that funding over.

LCR vs. capital ratios. Capital ratios such as the capital adequacy ratio and CET1 measure loss-absorbing capacity relative to risk-weighted assets, which is a solvency question. A bank can be well capitalized but illiquid if its assets cannot be sold quickly, or liquid but undercapitalized. For this reason Basel III tightened capital and added liquidity standards at the same time.

LCR vs. CRR and SLR (India). The cash reserve ratio requires banks to keep a share of deposits as cash with the central bank. The statutory liquidity ratio requires holdings of approved securities against deposits. Both are fixed percentages of liabilities. The LCR instead weights each funding source by how likely it is to run.

LCR vs. corporate liquidity ratios. The current ratio and quick ratio compare liquid assets to current liabilities for ordinary companies. The LCR is a bank-specific regulatory metric built on stress run-off rates, not on accounting balances alone.

FAQs

The Bottom Line

Bank investors, analysts and anyone judging a bank's resilience should read the LCR as a test of short-term cash, separate from solvency. The reported composition reveals more than the headline ratio: the share of Level 1 assets, the funding sources driving outflows and the trend over time. Because the measure covers only 30 days and relies on calibrated run-off rates, it works best alongside the NSFR and capital ratios.