Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools

Summary of document history  

This version

BCBS  | 
Standards
 | 
07 January 2013
 | 
Status:  Modified
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 |  75 pages
Topics: Liquidity risk

The Basel Committee issued the full text of the revised Liquidity Coverage Ratio (LCR) following endorsement on 6 January 2013 by its governing body - the Group of Central Bank Governors and Heads of Supervision (GHOS). The LCR is an essential component of the Basel III reforms, which are global regulatory standards on bank capital adequacy and liquidity endorsed by the G20 Leaders. 

The LCR promotes the short-term resilience of a bank's liquidity risk profile. It does this by ensuring that a bank has an adequate stock of unencumbered high-quality liquid assets (HQLA) that can be converted into cash easily and immediately in private markets to meet its liquidity needs for a 30 calendar day liquidity stress scenario. It will improve the banking sector's ability to absorb shocks arising from financial and economic stress, whatever the source, thus reducing the risk of spillover from the financial sector to the real economy. 

The LCR was first published in December 2010. At that time, the Basel Committee put in place a rigorous process to review the standard and its implications for financial markets, credit extension and economic growth and committed to address unintended consequences as necessary. Subsequent revisions to the LCR agreed by the Committee have amended the the definition of HQLA and net cash outflows, the timetable for phase-in of the standard and additional text to give effect to the Committee's intention for the stock of liquid assets to be used in times of stress. 

Once the LCR has been fully implemented, banks should treat a 100% LCR as a minimum requirement in normal times. During a period of stress, banks would be expected to use their pool of liquid assets, thereby temporarily falling below the minimum requirement. 

The 100% minimum LCR requirement applies from 1 January 2019, with the requirement having been phased-in gradually since 2015.