Under the Basel III international regulatory framework, what does the 'Liquidity Coverage Ratio' (LCR) specifically require financial institutions to maintain?

💡 Solution & Explanation

The Liquidity Coverage Ratio under Basel III mandates that banks maintain an adequate stock of unencumbered high-quality liquid assets that can be easily converted into cash to meet liquidity needs for a 30-day calendar stress scenario characterized by severe deposit withdrawals. High-quality liquid assets include cash, central bank reserves, and certain high-credit-rating marketable government securities. This standard was introduced to ensure that banks possess sufficient liquidity buffers to withstand acute short-term funding liquidity disruptions. A related Basel III metric is the Net Stable Funding Ratio, which addresses medium- and long-term structural funding risks.