The LCR denominator built line by line from Basel run-off and inflow rates, and why 30-day wholesale funding lowers the ratio even when held as reserves.
LCR net cash outflows are each funding balance multiplied by its run-off rate, plus drawdowns on committed facilities, minus contractual inflows at their inflow rates, with inflows capped at 75 per cent of outflows. For an illustrative bank with €16,300 million of deposits and commitments, outflows are €2,975 million, inflows €1,500 million and net cash outflows €1,475 million, so €1,800 million of HQLA gives an LCR of 122.0 per cent. The same €1,000 million of deposits costs between €50 million and €1,000 million of HQLA depending on who placed it.
Worked in full in Financial Regulation by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Most LCR discussion is about the numerator: which assets count, the haircuts, the cap on Level 2 assets covered in how the 40 per cent cap works. Yet the denominator is where a treasurer has the most room. The Basel standard does not ask what the bank expects to lose over 30 days of stress; it prescribes a run-off rate for each type of funding and an inflow rate for each type of receivable. The ratio is therefore a function of the funding mix, and two banks with identical balance sheet totals can need very different liquidity buffers.
The rates below are the Basel III LCR standard rates for these categories. National implementations follow them closely but add detail, for instance higher run-off categories for some retail deposits, so check the local rule before reusing a figure. The standard also lets supervisors apply 3 per cent rather than 5 per cent to stable retail deposits where the deposit insurance scheme meets additional criteria; this case uses 5 per cent. Only balances that can be withdrawn or fall due within 30 days enter the calculation.
| Outflow item | Balance | Run-off rate | Outflow |
|---|---|---|---|
| Stable retail deposits (insured, established relationship) | 6,000 | 5% | 300 |
| Less stable retail deposits | 3,000 | 10% | 300 |
| Operational deposits, non-financial corporates | 1,500 | 25% | 375 |
| Non-operational deposits, non-financial corporates | 2,000 | 40% | 800 |
| Unsecured funding from financial institutions, due within 30 days | 800 | 100% | 800 |
| Undrawn committed credit facilities, non-financial corporates | 2,500 | 10% | 250 |
| Undrawn committed liquidity facilities, non-financial corporates | 500 | 30% | 150 |
| Total | 16,300 | 18.3% | 2,975 |
| Inflow item | Contractual amount | Inflow rate | Inflow |
|---|---|---|---|
| Performing loans maturing, retail and non-financial corporates | 1,200 | 50% | 600 |
| Maturing placements with financial institutions | 900 | 100% | 900 |
| Total | 2,100 | 1,500 |
Loans to customers count at only 50 per cent because the standard assumes the bank keeps lending to its franchise through the stress: half of what is repaid goes straight back out. Placements with other banks count in full, since the bank is assumed to stop rolling them.
Total outflows = Σ balance × run-off rate = €2,975 million
Total inflows = Σ amount × inflow rate = €1,500 million
Inflow cap = 75% × €2,975 million = €2,231 million; inflows of €1,500 million are below it, so all count
Net cash outflows = €2,975 million − MIN(€1,500 million, €2,231 million) = €1,475 million
LCR = HQLA / net cash outflows = €1,800 million / €1,475 million = 122.0%
Excel, with outflows in B1 and inflows in B2: =B1-MIN(B2,0.75*B1) for the denominator.
The surplus over 100 per cent is €325 million of HQLA. The blended run-off on the whole funding base is 18.3 per cent, but it is the mix that produces that figure, and the mix can move faster than the balance sheet total.
| New funding | Run-off rate | Added outflow, € m | LCR after | Change, points |
|---|---|---|---|---|
| Stable retail | 5% | 50 | 183.6% | +61.6 |
| Less stable retail | 10% | 100 | 177.8% | +55.7 |
| Operational corporate | 25% | 250 | 162.3% | +40.3 |
| Non-operational corporate | 40% | 400 | 149.3% | +27.3 |
| Financial institution, due within 30 days | 100% | 1,000 | 113.1% | −8.9 |
The last row is the one that surprises boards. Thirty-day money from another financial institution, even if every euro is parked in central bank reserves, lowers the LCR of a bank that is above 100 per cent, because it adds the same amount to the numerator and the denominator and pulls the ratio towards one. For a bank above 100 per cent, short wholesale funding cannot improve the ratio, whatever is done with it.
Migration works the same way. If stable retail deposits move to non-operational corporate status, each euro adds 35 cents of outflow. This bank's €325 million surplus is used up after €929 million of migration, 15.5 per cent of its stable retail base.
Raise the interbank placements to €3,000 million. Inflows become €3,600 million, more than the outflows of €2,975 million, and an uncapped calculation would show negative net outflows and a meaningless ratio. The cap allows only €2,231 million, so €1,369 million of inflows are ignored and net cash outflows are floored at €744 million, 25 per cent of gross outflows. The LCR is 242.0 per cent. The cap is why a bank can never meet the LCR from maturing receivables alone: at least a quarter of gross outflows must be covered by HQLA.
The cap applies to total inflows, not line by line. A bank near the cap gains nothing from additional short placements and should hold the cash as HQLA instead, where it counts in the numerator.
The LCR denominator is outflows by run-off rate less inflows capped at 75 per cent of outflows: €1,475 million here, for a ratio of 122.0 per cent. The funding mix moves it more than the balance sheet size does, and 30-day wholesale funding lowers it even when held as reserves. The book's two liquidity ratios workbook, with the rest of the capital and liquidity models, is in the free companion files.
Under the Basel III standard: 5 per cent for stable insured retail deposits (3 per cent where the deposit insurance scheme meets extra criteria), at least 10 per cent for less stable retail, 25 per cent for operational deposits, 40 per cent for non-operational deposits of non-financial corporates (20 per cent if fully insured) and 100 per cent for unsecured funding from financial institutions. On an illustrative €16,300 million base they produce outflows of €2,975 million, a blended 18.3 per cent.
So that a bank always holds high-quality liquid assets for at least a quarter of its gross outflows. In the illustrative case, raising interbank placements lifts inflows to €3,600 million against outflows of €2,975 million; the cap admits only €2,231 million and floors net outflows at €744 million, 25 per cent of gross outflows.
No, if the ratio is above 100 per cent. Funding due within 30 days from a financial institution runs off at 100 per cent, so investing it in HQLA adds the same amount to both sides. For the illustrative bank, €1,000 million of such funding held as reserves moves the LCR from 122.0 to 113.1 per cent.
This article is one calculation from Financial Regulation. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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