Liquidity Coverage Ratio (LCR)

The Liquidity coverage ratio is a simple proportion that creates the need of complex capital preservation processes.

LCR = Highly quality Liquid Assets/Total Net Cash Outflow over 30 days >= 100%

After the Great Recession (2007-2008), Basel Committee on Banking supervision introduced LCR as a method to monitor and control a bank’s capability to recover from any future crisis. The objective of BCBS was to prepare banks to hold a certain level of highly liquid assets and fair fiscal solvency to discourage them from lending high short-term debts.

There are some limitations to Liquidity Coverage Ratio. One of it being that LCR requires banks to hold more cash, and this would obviously lead to fewer issued loans to the consumers. This could in turn result in slower economic growth. Another limitation of LCR would be that until the next financial crisis occurs, one can never be sure that the maintained LCR was enough of a financial cushion for the banks.

But, regardless of its limitations, Basel lll clearly implies the need to comply with Liquidity Coverage ratio norms and the requirement to create a robust solution for it is of utmost importance to banks. FinCluez can help banks in making this tedious process easier by offering reports and charts to help banks visualise their HQLA (High quality Liquid Assets) and accordingly maintain their LCR ratio. Profinch also excels at implementing Oracle solutions (OFSAA) to help banks deal with LCR better.