Liquidity Coverage Ratio (LCR) Calculator

What Is the Liquidity Coverage Ratio?

The liquidity coverage ratio (LCR) is a bank liquidity rule from the Basel III framework. It compares the stock of assets a bank can turn into cash at once with the cash it expects to lose during a 30-day period of stress, such as a run on deposits combined with frozen funding markets.

• HQLA (high-quality liquid assets): assets that can be sold or pledged quickly with little loss of value, mainly cash, central bank reserves and top-rated government bonds.
• Net cash outflows: the cash expected to leave the bank over the next 30 calendar days of stress, minus the cash expected to come in.
• Minimum: 100%, so that liquid assets are at least equal to the net outflows.

The rule was written after the 2007 to 2009 financial crisis, when banks with enough capital still failed because they ran out of cash. The idea is simple: a bank that can survive 30 days on its own gives managers and supervisors time to act.

How to Calculate the LCR

A bank holds 2,500,000 in cash and cash equivalents and 1,750,000 in marketable securities. It expects 3,000,000 of cash outflows over the next 30 days:

1. Add the liquid assets. 2,500,000 + 1,750,000 = 4,250,000.
2. Find the 30-day outflows. Use the expected cash outflows for the next 30 days: 3,000,000.
3. Divide and multiply by 100. 4,250,000 ÷ 3,000,000 × 100 = 141.67% (rounded).

The bank holds 1,250,000 more than it needs to reach 100%. If the outflows left at an even daily pace, its liquid assets would last 42.5 days, because 30 × 4,250,000 ÷ 3,000,000 = 42.5.

LCR Examples

Exactly at the minimum. With 600,000 in cash and 400,000 in securities, liquid assets are 1,000,000. Against 1,000,000 of outflows the LCR is 100%. The bank meets the rule with nothing to spare.

Below the minimum. With 300,000 in cash and 150,000 in securities, liquid assets are 450,000. Against 600,000 of outflows the LCR is 450,000 ÷ 600,000 × 100 = 75%. The shortfall is 150,000, and at an even daily pace the assets would be used up after 22.5 of the 30 days.

What Is a Good LCR?

The regulatory line is 100%. In practice most banks aim to stay some way above it, so that a bad week does not push them under. Higher is safer, but it has a cost: cash and government bonds earn less than loans, so a very high LCR can hold back profit. The Basel rules also say that the buffer is there to be used. In a real period of stress a bank may let its LCR fall below 100% for a time, with its supervisor watching.

What Counts as High-Quality Liquid Assets?

The full Basel rule sorts liquid assets into levels. The safer the level, the more of its value counts. The cut taken off the value is called a haircut.

Level 1 assets can be held without limit. Level 2 assets together may make up no more than 40% of the HQLA stock, and Level 2B assets no more than 15%. For example, a bank with 3,000,000 of Level 1 assets, 1,000,000 of Level 2A assets and 500,000 of Level 2B assets at a 50% haircut counts:

Its HQLA is 4,100,000, not the 4,500,000 on the balance sheet. Against 3,000,000 of net outflows the LCR is 136.67%.

How Net Cash Outflows Are Worked Out

The bottom line of the ratio is not a simple forecast. Each kind of funding is given a run-off rate, the share assumed to leave within 30 days of stress. Insured retail deposits get low rates, such as 5% or 10%, while funding from other financial institutions can be counted at 100%. Expected inflows, such as loan repayments, are then taken away, but only up to a cap:

With 4,000,000 of outflows and 1,000,000 of inflows, net outflows are 3,000,000. If inflows were 3,500,000, the cap would limit them to 75% of 4,000,000, which is 3,000,000, so net outflows would still be 1,000,000. The cap means a bank must always hold liquid assets worth at least 25% of its outflows. Enter the net figure in the third field of the calculator.

What This Calculator Does and Does Not Do

This calculator uses a simplified version of the rule. It adds cash and marketable securities at full value and divides by the outflow figure you enter:

• No haircuts. If some securities are Level 2 assets, enter their value after the haircut.
• No caps. It does not check the 40% and 15% limits on Level 2 assets.
• No run-off rates. Work out net cash outflows first and enter that one figure.

That makes it a quick estimate for study, planning and sense checks. A figure reported to a supervisor has to follow the full rule in the bank's own country.

How Much HQLA Is Needed for a Target LCR?

Turn the formula around to find the liquid assets needed for a chosen ratio:

A bank can raise its LCR in two ways: hold more liquid assets, or cut the outflows by using steadier funding such as insured retail deposits and longer-term borrowing. If the outflows in the main example rose from 3,000,000 to 3,600,000, the same 4,250,000 of assets would give 118.06% in place of 141.67%.

When the LCR Came Into Force

The Basel Committee published the final LCR standard in January 2013. The minimum was phased in over five years:

Each country writes the standard into its own rules, and the details can differ. In the United States the banking regulators finalized their version in September 2014, aimed at large banking organizations. In the European Union it applies through the Capital Requirements Regulation.

LCR vs NSFR vs Quick Ratio

Basel III has two liquidity ratios. The LCR looks at the next 30 days. The net stable funding ratio (NSFR) looks a full year ahead and asks whether long-term assets are paid for with stable funding. Both have a 100% minimum.

The LCR and NSFR are rules for banks. For an ordinary company, use the quick ratio for a similar short-term test. For the one-year bank measure, see the net stable funding ratio calculator.

Common Mistakes

• Counting every security. Only assets that can be sold fast at a known price are HQLA. Loans and unlisted holdings are not.
• Counting pledged assets. Assets already used as collateral are not free to sell, so they do not count.
• Using gross outflows. The bottom line is outflows minus capped inflows.
• Counting all inflows. Inflows above 75% of outflows are ignored.
• Using total liabilities. Only cash expected to leave in the next 30 days belongs underneath.

Key Terms

LCR

Liquidity coverage ratio: HQLA ÷ 30-day net cash outflows × 100.

HQLA

High-quality liquid assets, which can be turned into cash quickly with little loss.

Net cash outflows

Stressed outflows over 30 days minus inflows capped at 75% of outflows.

Haircut

The cut taken off an asset's market value when it is counted as HQLA.

Run-off rate

The share of a funding source assumed to leave within 30 days of stress.

Basel III

The international bank rulebook written after the 2007 to 2009 financial crisis.

How to Use the Liquidity Coverage Ratio (LCR) Calculator

1. Enter the liquid assets. Type cash and cash equivalents and marketable securities, such as 2,500,000 and 1,750,000. Enter 0 if there are none of one kind. Commas are fine.
2. Enter the 30-day cash outflows. Type the cash outflows expected over the next 30 days, such as 3,000,000. Use net outflows if you have them.
3. Read and copy the result. The LCR appears as you type, with the working, the total of liquid assets, the surplus or shortfall, the days covered and whether the 100% minimum is met. Press Copy to copy it, or Clear or Esc to start again.

Example: 300,000 in cash, 150,000 in marketable securities and 600,000 of 30-day cash outflows. The result is 75%, from 450,000 ÷ 600,000 × 100 = 75%, which is a shortfall of 150,000 against the 100% minimum.

Who Can Use This Calculator?

Frequently Asked Questions (FAQs)

Sources

• Bank for International Settlements. Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools.
• Bank for International Settlements. Liquidity Coverage Ratio (LCR), Executive Summary.
• Bank for International Settlements. Basel Framework: Liquidity Coverage Ratio.
• Federal Reserve Board. Federal banking regulators finalize liquidity coverage ratio.
• European Banking Authority. Liquidity risk.
• Wikipedia. Basel III.