What does the liquidity coverage ratio require financial institutions to maintain?

The liquidity coverage ratio (LCR) specifically requires financial institutions to maintain a sufficient quantity of high-quality liquid assets (HQLA) that can be quickly converted into cash. This is crucial for ensuring that these institutions can meet any short-term cash outflows they might encounter during a period of financial stress or market disruptions. The goal of the LCR is to promote the short-term resilience of a bank's liquidity risk profile by making sure that it has adequate liquid assets available to withstand a 30-day stressed funding scenario.

The emphasis on high-quality liquid assets is that they should be low-risk and easily tradable in the market, ensuring that they can be readily liquidated if needed. This requirement not only bolsters the stability of individual financial institutions but also contributes to the overall stability of the financial system. Maintaining these liquid assets as mandated by the LCR allows banks to manage their cash flow effectively and reduces the risk of a liquidity crisis.