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The liquidity coverage ratio, or LCR, requires banks and other financial institutions to hold enough cash and liquid assets on hand to weather a month-long period of market stress. The ratio is found by dividing a firm's liquid assets by its projected net cash outflow. Financial institutions must have enough cash available to cover their total net cash outflows over a 30-day period.

The ratio looks like this:

The global financial crisis of 2007-2008 prompted the Basel Committee on Bank Supervision to propose the liquidity coverage ratio. It’s designed to help prevent banks and other financial institutions from having to borrow money from the central bank in the event of another crisis.

One disadvantage of the liquidity coverage ratio is that maintaining the required levels of cash assets hampers the ability of banks to loan short-term debt.

Covered companies were required to meet 80 percent of the minimum liquidity coverage ratio by 2015. They’re required to be at 100 percent by 2017.

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