Which regulatory measure ensures banks have enough funding for their obligations?

The Liquidity Coverage Ratio (LCR) is a regulatory measure designed to ensure that banks maintain a sufficient level of liquid assets to cover their short-term obligations. This requirement is part of the Basel III framework, which aims to bolster the financial stability of banks by ensuring they can withstand periods of financial stress.

The LCR specifically mandates that banks hold an adequate amount of high-quality liquid assets (HQLA) that can be quickly converted into cash. This is crucial for covering net cash outflows over a 30-day stress period. By ensuring that banks have these liquid assets readily available, the LCR helps to prevent liquidity crises that could arise from sudden withdrawals or other financial disruptions.

While other measures like the Net Stable Funding Ratio (NSFR) and the Capital Adequacy Ratio contribute to a bank's overall stability and solvency, they address different aspects of financial management. The NSFR focuses on long-term stability by ensuring that a bank's funding is stable over a one-year horizon, and the Capital Adequacy Ratio evaluates the capital a bank must hold relative to its risk-weighted assets. The Loan to Deposit Ratio is a measure of liquidity but does not have the rigorous standards established by the LCR.

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