The liquidity coverage ratio (LCR) is a banking rule that requires a bank to hold enough high-quality liquid assets to cover its net cash outflows over a 30-day stress scenario. You calculate it as high-quality liquid assets divided by total net cash outflows over 30 days, expressed as a percentage. The minimum is 100%, meaning a bank must hold at least one dollar of liquid assets for every dollar it could be called on to pay over a tough month.
LCR is part of the Basel III rules brought in after the 2008 financial crisis, when several banks failed not because they were insolvent but because they ran out of cash. The ratio exists to make sure a bank can survive a short, sharp run on its funding without help, so a wobble does not turn into a collapse.
HQLA over 30-day outflows.Liquid assets divided by net cash outflows in a 30-day stress, as a percentage.
The floor is 100%.Banks must hold at least enough liquid assets to survive a 30-day funding squeeze.
It is a bank rule.LCR applies to banks under Basel III, not to ordinary businesses.
The LCR formula is high-quality liquid assets divided by total net cash outflows over 30 days, times 100. High-quality liquid assets (HQLA) are things a bank can turn into cash quickly with little loss of value, such as cash, central bank reserves and high-grade government bonds. Net cash outflows are the expected outflows minus capped inflows over a 30-day period of stress. Enter figures below to see the ratio.
Minimum requirement under Basel III is 100%. General information, not financial advice.
So a bank with 120 million in HQLA and 100 million of net outflows has an LCR of 120%, comfortably above the floor. A ratio below 100% means the bank could run short of cash in a stressed month and would be expected to fix it. Banks typically aim well above 100% to keep a margin of safety.
The denominator is more involved than it looks. Net cash outflows are gross expected outflows over the 30 days, less expected inflows, but the inflows are capped at 75% of outflows. That cap is deliberate: a bank cannot assume it will be fully rescued by money flowing in during a crisis, because in a genuine stress those inflows may not arrive on time. So even a bank expecting large repayments must still hold a real cushion of its own liquid assets. This is the difference between looking liquid on paper and being liquid when funding actually dries up, which is the exact failure LCR was written to prevent.
The minimum liquidity coverage ratio under Basel III is 100%. A bank must hold high-quality liquid assets at least equal to its projected net cash outflows over a 30-day stress period. In practice most banks run higher, often 120% to 150% or more, because regulators expect a buffer and because dipping below the line draws scrutiny. The requirement is phased in by jurisdiction and applies mainly to larger, internationally active banks, though many national regulators extend a version of it to smaller institutions too. The rule is supervised by central banks and reported regularly, so it is a live operating constraint rather than a once-a-year calculation. A bank is also allowed to let its ratio fall below 100% during a genuine period of stress, since the buffer exists precisely to be used, but it must report the breach and restore the ratio promptly once conditions normalize.
High-quality liquid assets are assets a bank can convert to cash quickly and at little loss even in stressed markets. They fall into tiers, and the tiering and haircuts stop a bank from claiming it is liquid on the back of assets that would crash in value the moment it needed to sell them.
| Tier | How it counts | Typical assets |
|---|---|---|
| Level 1 | The safest, counted at full value. | Cash, central bank reserves, high-grade sovereign debt. |
| Level 2 | Slightly riskier, counted at a haircut so only part of the value is included. | Certain government and corporate bonds, some covered bonds. |
The outflow side works similarly, applying assumed run-off rates to different funding sources, since a retail deposit is far stickier in a crisis than wholesale funding from other banks.
To qualify as HQLA, an asset also has to be unencumbered, meaning it is not already pledged as collateral somewhere else, and it must be something the bank can actually sell or repo at short notice without moving the market against itself. A government bond locked up against another obligation does not count, however safe it is, because it cannot be used to raise cash in the moment of need. That insistence on truly free, truly liquid assets is what gives the ratio its bite.
The liquidity coverage ratio measures short-term resilience over 30 days, while the net stable funding ratio (NSFR) measures funding stability over a one-year horizon. The two are companion Basel III rules: LCR asks whether a bank can survive a month-long crunch, and NSFR asks whether its longer-term assets are backed by reliably stable funding. A bank can pass one and fail the other, which is why both exist. Together they cover the short and the long view of liquidity risk, the same instinct behind the everyday liquidity ratios that ordinary businesses watch.
The same instinct behind LCR drives the everyday liquidity ratios that ordinary businesses watch. If you run a business rather than a bank, LCR is not a ratio you will ever report, but the idea behind it is exactly the one your own liquidity ratios capture: can you cover what is due soon with the liquid resources you have?
Liquidity ratio familyThe broad measure of whether current assets cover what is due soon.
Quick ratioStrips out slower assets to test cover from cash and near-cash only.
Acid-test ratioThe strictest view: only the most liquid assets count against short-term obligations.
Receivables collected on timeThe biggest near-cash asset most businesses hold, so good AR insights and reporting is the practical liquidity buffer.
Collecting receivables on time is the practical version of holding a strong liquidity buffer: faster collections turn invoices into cash sooner, which is the same goal LCR pursues for banks, just without the regulator.
The deeper lesson travels well beyond banking. The 2008 crisis showed that a profitable balance sheet is no protection if you cannot meet payments due this week, and the same is true for a small business that is growing fast but cash-poor because its money is tied up in unpaid invoices. You will never file an LCR, but the question it forces a bank to answer, can I cover what is due soon, is one every finance team should be able to answer about its own ledger. Keeping a healthy cushion of cash and quickly collectable receivables is the practical equivalent, and it is the cheapest insurance against a short-term squeeze.
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