It stands for liquidity-based microprudential and macroprudential instruments; a type of microprudential and macroprudential instruments (MPIs) that impacts a bank’s funding needs, and possibly its deposit policies. As a macroprudential measure, liquidity requirements – when applied to a broad scale– can shape the overall money market and as a result influence a central bank’s monetary policy transmission.

These requirements help a central bank to narrow the gap between the maturity of banks’ assets and liabilities, and may reduce the interest rate risks of individual banks and give rise to specific implications for capital requirements.

The impact of liquidity-based MPIs on monetary policy transmission potentially come up through a set of channels- namely, interest rate channel, bank funding and lending channel, balance sheet and profitability channel, bank capital channel and formation of expectations.