Definition
Liquidity Coverage Ratio (LCR)
The Liquidity Coverage Ratio requires a bank to hold enough high-quality liquid assets to cover its net cash outflows over a 30-day stress scenario.
LCR is a Basel III liquidity standard the RBI enforces. It is high-quality liquid assets (mainly cash, RBI balances and government securities) divided by projected 30-day net outflows under stress, and must be at least 100%.
LCR ensures a bank can survive a month-long funding squeeze without fire-selling assets. Because government bonds qualify as liquid assets, the requirement also creates structural demand for G-Secs. The RBI periodically tweaks outflow assumptions, for instance for digitally accessible deposits.
Related terms
- Basel III NormsBasel III is the global bank regulation framework, adopted by the RBI, that strengthens capital quality, adds liquidity and leverage standards, and introduces capital buffers.
- Net Stable Funding Ratio (NSFR)The Net Stable Funding Ratio requires a bank to fund its assets with sufficiently stable sources of funding over a one-year horizon.
- SLR (Statutory Liquidity Ratio)The SLR is the minimum share of their deposits that banks must keep parked in safe liquid assets like government securities, cash or gold before they can lend the rest.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.