How it works

The liquidity coverage ratio (LCR) is the short-term liquidity standard of the Basel framework as transposed into EU law. It compares a bank's stock of high-quality liquid assets (HQLA) against the net liquidity outflows it would face over a 30 calendar-day period of acute stress. The ratio must be at least 100%, meaning the buffer of liquid assets must fully cover the stressed net outflows.

HQLA are assets that can be converted into cash quickly and with little loss of value; they are grouped into tiers, with cash and central bank reserves and high-grade sovereign bonds forming the highest-quality level and other assets admitted subject to haircuts and caps. Net outflows are computed by applying standardised run-off rates to different funding sources — retail deposits attract lower rates than unsecured wholesale funding — and netting against capped inflows. The scenario deliberately assumes a combined idiosyncratic and market-wide shock.

The LCR is set out in the CRR, with the general liquidity coverage obligation in Art. 412 and the mandate for detailed specification in Art. 460. The granular calibration — HQLA eligibility, run-off and inflow rates, and the 100% minimum — is contained in the LCR Delegated Regulation (EU) 2015/61, adopted under that mandate. Banks report the LCR to supervisors, and it is assessed within the liquidity limb of the SREP.

Relationship to the NSFR

The LCR is the short-horizon half of a pair. It ensures survival over 30 days of stress; the net stable funding ratio (NSFR) addresses the structural, one-year funding profile. A bank can satisfy one and not the other, so supervisors monitor both. Together they discipline the maturity transformation that makes banks vulnerable to runs.

Relevance for resolution

Liquidity, not just capital, is what typically tips a bank into failure: an institution can be solvent on paper yet fail because it cannot meet outflows. A weak or falling LCR is therefore a leading indicator on the path towards failing or likely to fail. The LCR also frames liquidity in resolution — the question of how a bank meets outflows while it is being stabilised. A resolved bank that has absorbed losses through bail-in may still face deposit flight and loss of market access, so resolution planning examines whether HQLA and central bank facilities can bridge the firm through the resolution weekend and beyond. Analysts should read the LCR alongside capital metrics as a measure of how much runway a firm has before liquidity stress forces the authorities to act.