Liquidity coverage ratio (LCR) is a liquidity measure/ liquidity buffer (liquidity-related tool) that reflects a bank’s ability to manage its liquidity to meet its customers’ needs (customers’ access to their deposited funds). A bank’s liquidity can be defined in its broader ability to generate or secure liquidity- including through access to central bank facilities. It is also affected by the stability of a bank’s funding profile, and the factors that drive change in the ratio.

The liquidity coverage ratio (LCR) is calculated by dividing a bank’s most liquid assets by its total net cash flows (outflows), over a 30-day stress period. It is given by the following formula:

LCR= stock of HQLA ÷ net outflows

Where: LCR ≥ 100%

The most liquid assets (high-quality liquid assets, HQLAs) are those that can be converted easily and quickly into cash or monetary assets. Net outflows are those that are expected to arise over the next 30 calendar days.

Total net cash outflows are calculated as the total expected cash outflows minus the total expected cash inflows arising under a certain stress scenario. The total expected outflows are determined by multiplying the outstanding balances of different categories of liabilities and off-balance sheet commitments by the supervisory rates at which they are expected to run off or be drawn down (outflow rates).

Total expected cash inflows are estimated by multiplying the outstanding balances of different contractual receivables by the applicable inflow rates to. The difference between the stressed outflows and inflows is the minimum size of the HQLA stock:

Minimum size of HQLA stock= stressed outflows – stressed inflows