Liquidity Coverage Ratio : RBI
RBI recently issued the draft guidelines for banks on the Liquidity Coverage Ratio (LCR), essentially asking them to set aside higher stock of liquid securities as a buffer on deposits.
- Liquidity Coverage Ratio (LCR) refers to the proportion of highly liquid assets held by financial institutions to ensure that they maintain an ongoing ability to meet their short-term obligations (i.e., cash outflows for 30 days).
- 30 days was selected because, in a financial crisis, a response from governments and central banks would typically take around 30 days.
- It is intended to make sure that banks and financial institutions have a sufficient level of capital to ride out any short-term disruptions to liquidity.
- LCR in banking resulted from the Basel III agreement, which is a series of measures undertaken by the Basel Committee on Bank Supervision (BCBS).
- In India, RBI issued Basel III liquidity guidelines in 2012.
- RBI implemented LCR in January 2015, and as per a circular in 2020, banks should maintain sufficient HQLA at all times to meet unexpected withdrawals.
