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Assets that can generally be converted into cash readily, including under stressed market conditions.
A bank uses this buffer to meet withdrawals and other cash obligations without relying entirely on fresh borrowing. The Basel liquidity coverage ratio compares eligible liquid assets with projected net cash outflows in a specified 30-day stress scenario. Some qualifying assets receive a haircut, so their recognised buffer value is below their market value. Assets already pledged elsewhere may be unavailable for this purpose.
Suppose an illustrative bank has 100 million of eligible cash and government securities, against 80 million of net outflows in the prescribed stress calculation. Its simplified liquidity coverage ratio is 100 ÷ 80, or 125%. If the buffer falls to 60 million with outflows unchanged, the ratio falls to 75%. These numbers are hypothetical and omit the detailed regulatory classifications and adjustments.
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