This lesson focuses on the supplementary and equally critical pillars of Basel III: the requirements for liquidity management and the leverage ratio, designed to prevent excessive risk-taking and funding crises.

6.1 The Importance of Liquidity
The 2008 crisis highlighted that even solvent banks could fail if they ran out of cash. Liquidity is a bank’s ability to meet its short-term obligations. The Basel III framework introduced two global minimum standards to address this: the LCR and the NSFR .

6.2 The Liquidity Coverage Ratio (LCR)
The LCR is a short-term standard designed to ensure banks have enough High-Quality Liquid Assets (HQLA) to survive a 30-day stress scenario. The minimum requirement is 100% .
LCR = (Stock of HQLA / Total Net Cash Outflows over 30 days) ≥ 100%
HQLA includes assets that can be easily and quickly converted to cash with little or no loss of value, such as government bonds and central bank reserves .

6.3 The Net Stable Funding Ratio (NSFR)
The NSFR is a longer-term structural standard that requires banks to maintain a stable funding profile over a one-year horizon. It ensures that long-term assets are funded by stable, long-term liabilities (e.g., core deposits, long-term wholesale funding) rather than short-term, volatile wholesale funding .
NSFR = (Available Stable Funding / Required Stable Funding) ≥ 100%

6.4 The Leverage Ratio
The leverage ratio is a non-risk-based “backstop” measure. It aims to curb excessive leverage (borrowing) by requiring banks to hold a minimum level of Tier 1 capital against their total exposure (both on and off-balance sheet), without any risk-weighting. The Basel III minimum is 3% .
Leverage Ratio = (Tier 1 Capital / Total Exposure) ≥ 3%
This acts as a simple safeguard against the risk that risk-weighting models might underestimate risk, and it is a core part of prudential supervision .

6.5 The Context of Supervision
These liquidity and leverage standards are part of the broader model of prudential supervision where the supervisor examines a bank’s overall financial health and risk management, ensuring its business model is sustainable and does not pose a threat to financial stability .