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Risk Management in Banking and Insurance · Liquidity Risk Management

Basel III Liquidity Standards: LCR and NSFR Explained

Updated 11 October 2026 · Fact-checked

The Liquidity Coverage Ratio (LCR) checks that a bank holds enough high-quality liquid assets to cover net cash outflows over a 30-day stress period. The Net Stable Funding Ratio (NSFR) checks that stable funding covers long-term assets over one year. Both must be at least 100%. Compute each as a simple ratio.

Understand Basel III Liquidity Standards: LCR and NSFR

Banks fail more often from running out of cash than from running out of capital. Basel III therefore added two liquidity standards that work together: one for the short term and one for the structure of the balance sheet.

The Liquidity Coverage Ratio (LCR) is a 30-day test. The bank assumes a severe stress, such as deposit runs and drying-up of funding. It asks: do I hold enough High Quality Liquid Assets (HQLA) to pay my net outflows for 30 days without outside help? HQLA are assets that can be turned into cash quickly, with little loss of value, even in stress.

HQLA has two levels. Level 1 assets are the safest and are counted at full value: cash, balances with the central bank (to the extent permitted), and high-quality government securities. In India, RBI allows certain items, such as the permitted share of government securities held under the statutory liquidity ratio (SLR), to count as Level 1. Level 2 assets are less liquid and carry a haircut. Level 2A (for example, certain highly rated corporate bonds) has a 15% haircut. Level 2B assets have larger haircuts and tighter limits. Level 2 in total cannot exceed 40% of HQLA, and Level 2B cannot exceed 15%. Check the exact items RBI permits in its circular before the exam.

Net cash outflows are total expected outflows less total expected inflows over 30 days. Outflows come from running off deposits and other liabilities at prescribed rates: stable retail deposits run off at a low rate, less stable and wholesale deposits at higher rates. Inflows are counted at prescribed rates too, and total inflows are capped at 75% of total outflows. So net outflow is never less than 25% of outflows.

The Net Stable Funding Ratio (NSFR) is a one-year structural test. It compares Available Stable Funding (ASF) with Required Stable Funding (RSF). ASF is the bank's capital and liabilities weighted by how stable they are: capital and long-term funding count most, stable retail deposits count highly, short-term wholesale funding counts little. RSF is the bank's assets and off-balance sheet items weighted by how hard they are to liquidate: cash needs almost none, long-term loans need a lot. The aim is to stop banks funding long-term loans with short-term money.

Key rules to remember

Liquidity Coverage Ratio
LCR = Stock of HQLA ÷ Total net cash outflows over the next 30 days ≥ 100%
Computed after applying haircuts and the caps on Level 2 assets.
Net cash outflows
Net cash outflows = Total expected outflows − Min(Total expected inflows, 75% × Total expected outflows)
Inflows are capped at 75% of outflows, so net outflow is at least 25% of outflows.
Expected outflow or inflow
Amount × run-off rate (outflow) or Amount × inflow rate (inflow)
Use the rates given in the question. Do not use remembered rates if the question supplies them.
HQLA stock
HQLA = Level 1 + Level 2A × (1 − 15%) + Level 2B × (1 − haircut)
Level 2 assets cannot exceed 40% of HQLA; Level 2B cannot exceed 15%. Apply caps when the question gives enough data.
Net Stable Funding Ratio
NSFR = Available Stable Funding ÷ Required Stable Funding ≥ 100%
ASF = Σ (liability or capital × ASF factor). RSF = Σ (asset or off-balance item × RSF factor).

How to solve Basel III Liquidity Standards: LCR and NSFR questions

Use this order for any LCR or NSFR numerical, and for theory questions that ask you to interpret a ratio.

  1. 1Identify which ratio is asked: LCR (30 days, liquid assets against outflows) or NSFR (one year, funding against assets).
  2. 2For LCR, list HQLA by level. Apply the haircut to Level 2 assets and keep Level 1 at full value.
  3. 3Check the caps: Level 2 not above 40% of HQLA and Level 2B not above 15%. Adjust only if the figures breach them.
  4. 4List each outflow item and multiply by its run-off rate. Do the same for inflows using inflow rates.
  5. 5Cap inflows at 75% of total outflows, then compute net outflows.
  6. 6Divide HQLA by net outflows. For NSFR, multiply each liability by its ASF factor and each asset by its RSF factor, sum both, and divide ASF by RSF.
  7. 7Compare with the 100% minimum, state pass or shortfall, and quantify the gap in rupees where asked.
  8. 8Add a one-line recommendation, such as raising HQLA or lengthening funding maturity.

Quickest way: Table-in-your-head LCR routine

When to use it: Use it for MCQs and short numericals where rates are given and you have little time.

  1. Write HQLA (after haircut) on the left and outflows minus capped inflows on the right.
  2. Compute 75% of outflows first. If inflows exceed it, use the cap straight away.
  3. Divide once. Convert to a percentage and compare with 100%.
  4. For a shortfall, extra HQLA needed = Net outflows − HQLA.
  5. For NSFR, compute ASF and RSF as two single sums, then divide.

Common mistakes in Basel III Liquidity Standards: LCR and NSFR

  • Forgetting the 75% cap on inflows.

    Students subtract all inflows because it looks like simple netting.

    Fix: Always compute 75% of outflows and use the lower of that and inflows.

  • Applying no haircut to Level 2 assets.

    All HQLA is treated as the same.

    Fix: Only Level 1 counts at full value. Level 2A takes a 15% haircut; use the stated haircut for Level 2B.

  • Mixing the time horizons of LCR and NSFR.

    Both are called liquidity ratios and both have a 100% minimum.

    Fix: Remember: LCR is 30 days and short term; NSFR is one year and structural.

  • Putting NSFR factors the wrong way round, treating long-term funding as low-weight.

    Students confuse ASF weights with RSF weights.

    Fix: ASF rewards stable liabilities with high factors. RSF burdens illiquid assets with high factors.

  • Dividing outflows by HQLA.

    Rushing under time pressure.

    Fix: HQLA is always the numerator in LCR. A ratio above 100% means a comfortable position.

  • Quoting rates and rules from memory when the question supplies its own.

    Students rely on remembered numbers.

    Fix: Use the question's run-off, inflow, haircut and factor values. Use remembered rules only when nothing is given.

Worked examples

Example 1

A bank has Level 1 assets of ₹600 crore and Level 2A assets of ₹100 crore (haircut 15%). Expected cash outflows over 30 days are ₹800 crore and expected inflows are ₹500 crore. Compute the LCR and say whether the bank meets the 100% minimum. Assume the Level 2 cap is not breached.

Show the solution
  1. Level 2A after haircut = 100 × (1 − 0.15) = ₹85 crore.
  2. Check cap: Level 2 share = 85 ÷ (600 + 85) = 12.4%, below 40%.
  3. HQLA = 600 + 85 = ₹685 crore.
  4. Inflow cap = 75% × 800 = ₹600 crore. Inflows of ₹500 crore are below it, so use ₹500 crore.
  5. Net outflows = 800 − 500 = ₹300 crore.
  6. LCR = 685 ÷ 300 = 228.3%.

Answer: LCR is about 228.3%, well above the 100% minimum, so the bank meets the requirement.

Example 2

A bank has Available Stable Funding of ₹4,200 crore. Its assets and their RSF factors are: cash ₹300 crore at 0%, government securities ₹1,000 crore at 5%, retail loans ₹3,000 crore at 85%, and other assets ₹800 crore at 100%. Compute the NSFR and the shortfall or surplus of stable funding.

Show the solution
  1. RSF from cash = 300 × 0% = ₹0.
  2. RSF from government securities = 1,000 × 5% = ₹50 crore.
  3. RSF from retail loans = 3,000 × 85% = ₹2,550 crore.
  4. RSF from other assets = 800 × 100% = ₹800 crore.
  5. Total RSF = 0 + 50 + 2,550 + 800 = ₹3,400 crore.
  6. NSFR = 4,200 ÷ 3,400 = 123.5%.
  7. Surplus stable funding = 4,200 − 3,400 = ₹800 crore.

Answer: NSFR is about 123.5%, above 100%, with a surplus of ₹800 crore of stable funding.

Exam tips

  • Practise one full LCR numerical daily until the inflow cap becomes automatic. It is the most common trap.
  • In descriptive answers, name both ratios, their horizon (30 days and one year), the minimum of 100% and the purpose of each.
  • Write the formula first, then each line of working. Marks are awarded for method even if one rate is misread.
  • For HQLA questions, state the level of each asset and the haircut before totalling.
  • End numerical answers with a one-line conclusion on compliance and what the bank should do.

Practice questions from Liquidity Risk Management

Basel III Liquidity Standards: LCR and NSFR in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Basel III Liquidity Standards: LCR and NSFR: frequently asked questions

What is the difference between LCR and NSFR?

LCR tests whether HQLA can cover net cash outflows over 30 days of stress. NSFR tests whether stable funding supports the bank's assets and commitments over one year. LCR is short term and NSFR is structural. Both have a 100% minimum.

What are Level 1 and Level 2 HQLA?

Level 1 assets such as cash, central bank balances and high-quality government securities count at full value. Level 2 assets are less liquid, take haircuts and are capped at 40% of HQLA. Check the RBI circular for the items permitted in India.

Why are inflows capped at 75% of outflows in LCR?

The cap stops a bank relying wholly on expected inflows, which may not arrive in stress. It ensures the bank holds HQLA against at least 25% of its total outflows.

How do I calculate LCR in an exam?

Total HQLA after haircuts, find net outflows after capping inflows at 75% of outflows, then divide HQLA by net outflows. Compare the result with 100% and comment on compliance.