What is the ratio of coverage of liquidity?

Liquidity coverage ratio is measurement required for banks to meet short -term financial obligations. Most countries strongly regulate banks and other financial institutions through a central bank or other sources of laws and requirements. The ratio of liquidity coverage is intended to cover short -term disruption in the normal activities of the bank. For example, a central bank may require a specific amount of liquid assets in banks, so these assets can cover abundant selections at the same time. This coverage prevents the bank from fulfilling these obligations, and it also prevents a government or central bank to save it. Banks in most economies do not have to maintain all the money they receive from deposits and other sources in their cash registers. The central bank or other government regulations require a small percentage to remain, with all other money available for loans and other financially rewarding investments. In the past, this has caused trouble as a customer running - a frantic period when individuals try to pull out ally your money from the bank - quickly exhausted cash assets. This panic may cause the bank to fail, even if it is financially viable because its money is placed in many types of investment. The Liquidity Coverage Ratio helps to prevent banks from experiencing and others to maintain cash in the institution.

Country

can use any number of formulas to create a standard liquidity ratio for banks and other financial institutions. For example, the ratio of coverage in the United States may require cash or government bonds sufficient to meet the selection or other needs for 30 days. Banks and other financial institutions may only need these cash and short -term bonds to cover all deposits from customers in the institution. Other times, there may be another character that is the basic amount of the proposal to cover liquidity to meet in terms of potential selections of cash.Again, countries have the ability to propose their own requirements for this ratio based on the current setting of their financial or capital markets.

In some cases, the ratio of liquidity coverage may not be able to stop all banking runs or massive selections in the short term. For example, if a bank or other financial institutions have sufficient coverage for their normal deposits, they may lack enough money for loans that they can call other institutions. When another bank calls a loan, lack of cash may be a special problem. In this scenario, banks may still need a rescue rope from the central bank to meet these requirements.