Definition
The LCR (liquidity coverage ratio) compares the buffer of high-quality liquid assets (HQLA) with expected net cash outflows over thirty calendar days under a stress scenario combining idiosyncratic and market-wide pressure. It must be at least 100%.
Calculation method
LCR = HQLA / (outflows − min(inflows; 75% of outflows)).
- HQLA are classified as Level 1, 2A and 2B, with increasing haircuts and caps: Level 2 assets cannot exceed 40% of the buffer, and Level 2B assets 15%.
- Outflows apply run-off rates to deposits according to their nature (stable, less stable, operational, corporate, financial) and to off-balance-sheet commitments.
- Inflows are capped at 75% of outflows, subject to exemptions.
The ratio is computed on a consolidated basis, by entity and by significant currency.
Regulatory requirement
The LCR is set by Article 412 of the CRR and specified by Delegated Regulation (EU) 2015/61. It is reported in the supervisory liquidity templates and monitored by the supervisor in the SREP. Institutions project and stress it in their ILAAP.
Practical challenges
- Fine classification of deposits and counterparties, which drives run-off rates.
- The unwind mechanism for repos and collateral, which affects compliance with the caps.
- LCR attribution analysis between two reporting dates, by component and item.
- Projecting and stressing the ratio, beyond the point-in-time regulatory calculation.
In RIALTO
This concept is covered by the LCR Insight Core module. The use case 'Securing regulatory production' shows it in practice.