The Bank for International Settlements published a BIS Paper reviewing the theoretical and empirical literature on the Basel III Liquidity Coverage Ratio (LCR) a decade after its implementation, assessing what is known about its design, effectiveness and behavioural impact. The stocktake finds broad evidence that the LCR has increased banks’ holdings of high-quality liquid assets and reduced reliance on fragile short-term funding, while also documenting trade-offs including weaker lending and higher risk-taking, and limited clarity on net financial-stability benefits. The paper reiterates that the LCR is designed to ensure banks can meet projected 30-day net cash outflows with unencumbered high-quality liquid assets, and summarises key design features including the split between Level 1 and Level 2 liquid assets, associated haircuts and caps, and the use of stressed run-off and inflow assumptions. Across models featuring fire-sale externalities, liquidity regulation is typically welfare-improving and often complements capital regulation, but may distort credit allocation and shift risk towards less-regulated intermediaries. Empirical work is described as consistent with these mechanisms: banks largely meet the requirement by raising reserves and government bond holdings, funding structures adjust less than assets, credit supply can fall in some settings, and profitability pressure can be associated with greater holdings of opaque or riskier assets and migration of liquidity risk to non-LCR banks. The survey points to open questions that remain central for policy and supervision, including the calibration of deposit run-off rates in a world of digital banking and concentrated uninsured deposits, whether buffer usability and procyclicality blunt the framework’s effectiveness in stress, and how liquidity regulation interacts with lender-of-last-resort tools and central bank collateral frameworks. It also notes that the 2023 banking turmoil has prompted the Basel Committee on Banking Supervision to re-examine assumptions underpinning the LCR and liquidity regulation more broadly.
Bank for International Settlements 2026-01-13
Bank for International Settlements surveys a decade of research on the Liquidity Coverage Ratio and highlights unresolved design and calibration issues
The Bank for International Settlements reviewed the Basel III Liquidity Coverage Ratio (LCR) a decade after implementation, noting its impact on banks' liquid assets and short-term funding, with trade-offs like weaker lending and higher risk-taking. The paper raises questions about deposit run-off rates, buffer usability, and liquidity regulation's interaction with central bank tools, especially after the 2023 banking turmoil prompted a Basel Committee re-examination.