What is required by the Liquidity Coverage Ratio (LCR)?

The Liquidity Coverage Ratio (LCR) is designed to ensure that financial institutions have enough liquid assets to meet their short-term obligations, particularly during times of financial stress or instability. The LCR mandates that banks hold a minimum amount of high-quality liquid assets (HQLA) that can easily be converted into cash. These assets must be sufficient to cover net cash outflows over a specified 30-day stress period. This requirement is critical for enhancing the resilience of banks and safeguarding the broader financial system by ensuring that banks can withstand short-term financial shocks.

In contrast to the other options, the focus of the LCR is specifically on liquidity and short-term obligations rather than maintaining a specific level of deposits, limiting the number of loans issued, or investing in long-term assets. Therefore, maintaining a robust liquidity position through the holding of liquid assets is the core requirement under the LCR framework.