The Liquidity Coverage Ratio (LCR) refers to the proportion of highly liquid assets that need to be held by a financial institution subject to the Basel III framework. The ratio is determined by transforming the total assets of a financial institution into a single measure that represents the sum of its liquid assets, claims on securitised assets, short-term debt securities and other short-term liabilities. Then, dividing this sum by the sum of total liabilities (including both long-term debt and equity).The liquidity ratio is an important component of the Bank for International Settlements' (BIS) new Basel III capital standards for banks. LCR measures the amount of cash or liquid financial instruments a bank holds, compared to the amount of capital it needs to support its liabilities. The ratio is measured as a positive number and is calculated as a percentage of Tier 1 capital. Banks must have sufficient liquidity in order to counterbalance their funding needs, which are likely to rise as economic growth picks up.The liquidity coverage ratio (LCR) is a liquidity requirement, and it is calculated by dividing the denominator of the LCR by the sum of risk-weighted assets less eligible uncleared exposures. A financial institution must hold a minimum of 4.5% of its highly liquid assets (HLE) in liquid assets, including cash and high quality liquid assets such as US Treasury securities, US Government agency obligations, and repurchase agreements (repos) collateralized by US Treasury securities, US Government agency obligations and repos.
