14. High-Quality Liquid Assets: the three levels, the haircuts and the caps

The Liquidity Coverage Ratio (LCR) considers only assets that stayed sellable through 2008. Everything else gets a haircut, and some assets do not even enter.

The LCR asks one question: can the bank survive 30 days of severe outflows (e.g., clients going to the ATM and withdrawn their money) using only assets it already holds?

Those assets are the so-called high-quality liquid assets (HQLA), and the buffer is a closed list defined in the regulation.

- Level 1 is the cash tier: coins, central bank reserves, 0% risk-weight government bonds. Full value, no limit.

- Level 2A is near-cash: sovereign bondsat a 20% risk weight, corporate and covered bonds rated AA- or better. A 15% haircut: every €100 counts as €85.

- Level 2B is tolerated: top-rated residential mortgage-backed securities (RMBS) at a 25% haircut, BBB- corporates and major-index equities at 50%.

Then two caps, both measured after haircuts:

- Level 2 can never exceed 40% of the buffer, and

- Level 2B alone never 15%. So at least 60% of every buffer is Level 1, cash-like by construction.

A quick example. €100 of government bonds Level 1, €40 of AA corporate bonds Level 2, €20 of equities Level 2B. After haircuts the pile is worth 100 + 34 + 10 = €144, and both caps hold.

€160 of assets, €144 of buffer.

In a real stress the buffer is meant to be spent: the bank monetises its HQLA and lets the LCR fall below 100%, while adopting Recovery and Resolution plans.

Full breakdown in the carousel 👇