How do I calculate the Liquidity Coverage Ratio in detail?

Question

AcadiFi · Accepted Answer

LCR = Stock of HQLA / Total Net Cash Outflows over next 30 calendar days ≥ 100%. HQLA are Level 1 (cash, central bank reserves, sovereigns at 0% haircut), Level 2A (15% haircut, capped at 40% of total), Level 2B (25-50% haircut, capped at 15%). Net outflows = outflows - min(inflows, 75% of outflows).

Worked example: Drennalt Bank, stress period 30 days.

HQLA:
- Cash and central bank reserves: $4,200M (Level 1, 0% haircut) → $4,200M
- Sovereign bonds rated AA: $2,100M (Level 1) → $2,100M
- Corporate bonds rated A: $900M (Level 2A, 15% haircut) → $765M
- Equities listed major index: $300M (Level 2B, 50% haircut) → $150M; cap = 15%·total = check
Total Level 2 before caps: $915M; Level 2B = $150M; subject to caps.

Outflows (next 30 days):
- Retail deposits stable: $6,000M × 3% = $180M
- Retail deposits less stable: $1,500M × 10% = $150M
- Unsecured wholesale (corp): $3,000M × 40% = $1,200M
- Committed credit lines to non-financials: $2,500M × 10% = $250M
Total outflows ≈ $1,780M

Inflows (capped at 75% of outflows = $1,335M):
- Contractual inflows retail loans: $900M × 50% = $450M
- Maturing reverse repos Level 1: $600M × 0% = $0 (stays as HQLA)
Net inflows recognized: $450M

Net outflows = $1,780 - $450 = $1,330M
LCR = ($4,200 + $2,100 + $765 + $150) / $1,330 = $7,215 / $1,330 = 542% ✓

Examples from stress testing at firms like Varentine Treasury show most large banks hold LCR 120-150%. FRM candidates should memorize run-off rates: 3%/10% retail, 40% unsecured corporate, 100% financial counterparties, 25% operational deposits.

How do I calculate the Liquidity Coverage Ratio in detail?

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