Liquidity risk | European Banking Authority (2024)

FAQs

What is the LCR ratio for European banks? ›

EU banks' LCR buffers remain meaningfully higher than the minimum requirement. However, during the review period from June 2022 to June 2023, EU banks' LCR showed a decline of 3 percentage points and ended up at a level of 163%, as of June 2023.

Liquidity is the risk to a bank's earnings and capital arising from its inability to timely meet obligations when they come due without incurring unacceptable losses. Bank management must ensure that sufficient funds are available at a reasonable cost to meet potential demands from both funds providers and borrowers.

The liquidity coverage ratio stood stable at 161.27% in the first quarter of 2023 (compared with 161.32% in the previous quarter and 167.39% in the first quarter of 2022). The net stable funding ratio remained stable at 125.87% (compared with 125.79% in the previous quarter and 128.88% in the first quarter of 2022).

Liquidity risk refers to how a bank's inability to meet its obligations (whether real or perceived) threatens its financial position or existence. Institutions manage their liquidity risk through effective asset liability management (ALM).

What Is a Good LCR? Experts say that a bank should have an LCR ratio of 1:1, but this is difficult to achieve and set as it requires a bank to keep enough liquid assets or cash at any one time for the next thirty days. As such, the Financial Stability Board (FSB) recommends having a liquidity coverage ratio of 100%.

LCR, liquidity coverage ratio

The LCR measures a bank's liquidity risk profile, banks have an adequate stock of unencumbered high-quality liquid assets that can be easily and immediately converted in financial markets, at no or little loss of value.

The three main types are central bank liquidity, market liquidity and funding liquidity.

To measure the liquidity risk in banking, you can use the ratio of loans to deposits. A liquidity risk example in banks is a decline in deposits or rise in withdrawals (which are liabilities for the bank). As a result, the bank is unable to generate enough cash to meet these obligations.

Liquidity Risk Indicators: Low levels of cash reserves, high dependency on short-term funding, or a high ratio of loans to deposits can hint at liquidity risk. Such indicators help banks ensure they can meet their financial obligations as they come due.

The LCR is calculated in accordance with the following formula: liquidity buffer ÷ net liquidity outflows over a 30 calendar-day stress period = liquidity coverage ratio %.

What is excess liquidity in ECB? ›

Excess liquidity is the money in the banking system that is left over after commercial banks have met specific requirements to hold minimum levels of reserves. Banks must hold these minimum reserves to cover certain liabilities, mainly customer deposits.

All eligible borrowers can raise ECB up to USD 750 million or equivalent per 01 financial year under the automatic route. In case of FCY denominated ECB raised from direct foreign equity holder, ECB liability equity ratio under the automatic route cannot exceed 7:1.

Liquidity risk is the risk of loss resulting from the inability to meet payment obligations in full and on time when they become due. Liquidity risk is inherent to the Bank's business and results from the mismatch in maturities between assets and liabilities.

It is calculated by dividing current assets less inventory by current liabilities. The optimum ratio is 1, above this figure there is good capacity to meet payments, below 1 there are weaknesses.

At its core, asset and liability management is a way for financial institutions to address risks resulting from a mismatch of assets and liabilities. Most often, the mismatches are a result of changes to the financial landscape, such as changing interest rates or liquidity requirements.

As of June 2023, all European countries had a healthy Tier 1 capital ratio, with Estonia reporting 23.5 percent, the highest in Europe. Estonia was followed by Luxembourg and Latvia, with ratios of 22.9 and 22.4 percent, respectively. The EU average was 17.3 percent.

European Central Bank

The aggregate Common Equity Tier 1 (CET1) ratio stood at 15.61%, the aggregate Tier 1 ratio stood at 17.03% and the aggregate total capital ratio stood at 19.69%.

In American cinemas, the common projection ratios are 1.85:1 and 2.40:1. Some European countries have 1.6:1 as the wide screen standard. The "Academy ratio" of 1.375:1 was used for all cinema films in the sound era until 1953 (with the release of George Stevens' Shane in 1.6:1).

As the leverage ratio is therefore not risk-based, the 3% leverage ratio requirement – which became binding for all banks on 28 June 2021 – serves as a simple backstop to risk-weighted capital requirements.