What does the liquidity coverage ratio (LCR) measure?

The liquidity coverage ratio (LCR) measures how well a financial institution can meet its short-term obligations using high-quality liquid assets (HQLAs). Specifically, the LCR requires banks to hold a certain amount of liquid assets that can easily be converted into cash to cover total net cash outflows over a 30-day stress period. This regulatory requirement helps ensure that institutions maintain an adequate buffer of cash and liquid assets to withstand potential financial crises.

The essence of the LCR is ensuring that the bank can survive a period of financial instability without needing to resort to emergency measures or external assistance. By requiring banks to hold a sufficient amount of high-quality liquid assets relative to their expected outflows, the LCR promotes stability within the financial system.