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The liquidity coverage ratio (LCR) refers to the proportion of highly liquid assets that need to be held by a financial institution subject to the Basel III framework.

It ensures that under a wide set of market conditions the firm can meet its short-term obligations.

Essential in the Basel III arrangements regarding the LCR is the definition of what constitutes a highly liquid asset.

The LCR ratio essentially is a stress test (typically measured over a 30-day period) that aims to anticipate a variety of market- and system-wide shocks and the necessity for banks to maintain sufficient liquidity to meet short-term obligations.