Liquidity & Balance Sheet
Liquidity Coverage Ratio
Also known as LCR
The liquidity coverage ratio (LCR) is a bank's stock of high-quality liquid assets divided by its projected net cash outflows over a 30-day stress period. US rules require large banks to keep it at or above 100%, or a reduced level for some, so they can survive a month-long run without new funding.
How to calculate the liquidity coverage ratio (LCR formula)
High-quality liquid assets (HQLA) are Level 1 assets (cash, reserves at the Federal Reserve and US Treasuries) counted in full, Level 2A assets (such as GSE securities) after a 15% haircut, and Level 2B assets (such as some investment-grade corporate debt) after a 50% haircut. Level 2 assets may make up at most 40% of HQLA and Level 2B at most 15%. Total net cash outflows apply prescribed run-off rates to each funding source and commitment, then subtract inflows, which may offset no more than 75% of outflows. The US rule, 12 CFR Part 249, adds a peak-day measure for the largest banks.
- Value Level 1 assets in full, Level 2A assets at 85% and Level 2B assets at 50% of market value.
- Apply the caps (Level 2 at most 40% of the total, Level 2B at most 15%). The result is HQLA.
- Apply the rule's run-off rates to deposits, wholesale funding and undrawn commitments to get 30-day outflows; subtract inflows, capped at 75% of outflows.
- Divide HQLA by net cash outflows and multiply by 100. A result of 100% or more meets the full requirement.
Worked example
Illustrative figures. The LCR is not reported on the FFIEC call report; banks subject to 12 CFR Part 249 publish it in their quarterly LCR disclosures.
Why does the LCR matter?
Liquidity, not capital, is what usually kills a bank first: the failures of 2008 and 2023 were runs on funding. The LCR forces large banks to pre-fund a month of severe stress with assets they can sell or pledge quickly. Under the 2019 tailoring rule, Category I and II banks must meet 100%; Category III banks meet 100% or 85% and Category IV banks meet 70% or nothing, depending on their weighted short-term wholesale funding.
How do you interpret the LCR?
Large US banks usually report LCRs between 110% and 140%. A ratio near 100% meets the rule but leaves little room before a remediation plan is required. Banks under $100 billion are not subject to the LCR, and it is not on the call report: banks that must meet it publish quarterly LCR disclosures, and for smaller banks liquidity has to be read from call report items such as cash, unpledged securities, uninsured deposits and wholesale funding.
What is a good LCR?
| Range | Label | Interpretation |
|---|---|---|
| ≥ 120% | Comfortable | Buffer above the regulatory minimum. |
| 100–120% | Adequate | Meets the full requirement with a limited cushion. |
| 90–100% | Watch | Below 100% for a full-LCR bank; notice and a plan go to the supervisor. |
| < 90% | Concern | Material liquidity shortfall under the stress assumptions. |
Frequently asked
What is the liquidity coverage ratio formula?
LCR = high-quality liquid assets / total net cash outflows over 30 days × 100. Both parts follow the haircuts, caps and run-off rates in 12 CFR Part 249.
Which US banks must meet the LCR?
Banks in Category I to IV of the 2019 tailoring rule, broadly those with $100 billion or more in assets. Category I and II banks meet 100%; Category III banks meet 100% or 85% and Category IV banks 70% or none, depending on their short-term wholesale funding.
What counts as a high-quality liquid asset?
Cash, reserves at the Federal Reserve and US Treasuries count in full as Level 1. GSE securities and some corporate debt and equities count as Level 2 after haircuts of 15% or 50%, within caps.
Why did the LCR not prevent the 2023 bank failures?
Silicon Valley Bank, the largest of the banks that failed, was a Category IV bank that did not have to meet the LCR. Its uninsured deposits also left far faster than the rule's run-off rates assume.
How does the LCR differ from the net stable funding ratio?
The LCR covers a 30-day stress period. The net stable funding ratio is a one-year structural measure that compares stable funding with the assets that need it.
Sources
- 12 CFR Part 249: Federal Reserve Regulation WW (Liquidity Risk Measurement Standards)
- 12 CFR Part 50: OCC liquidity risk measurement standards
- FR 2052a: Complex Institution Liquidity Monitoring Report (Federal Reserve)
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