To ensure that commercial banks maintain sufficient liquid reserves to survive a severe short-term liquidity crunch, the Basel III framework enforces the Liquidity Coverage Ratio (LCR).

The LCR requires banks to hold an unencumbered buffer of High-Quality Liquid Assets (HQLA) that matches or exceeds estimated net cash outflows over a 30-day stress window. The plain-text regulatory formula requires:

LCR = High_Quality_Liquid_Assets / Total_Net_Cash_Outflows_Over_30_Day_Stress

The ratio must remain equal to or greater than 100%. High-Quality Liquid Assets are divided into tiers based on safety and market liquidity: Level 1 assets (such as central bank reserves and sovereign bonds) receive a zero percent haircut, while Level 2 corporate bonds face steep discounts, ensuring the institution’s cash buffers remain liquid during a crisis.