LCR and NSFR in practice

L2.7.04: Basel III and its finalisation calculated the two Basel liquidity ratios on a few lines of a small bank. A real treasury sees them differently: as two numbers on a dashboard, recalculated every day, that move every time a corporate client takes a deposit, a CP issue matures or a sales team sells a credit line. RiskAtoms Bank's are 157.4% and 146.7%. This lesson takes them apart, finds the levers that move them, and asks why nobody runs a bank at 100%.

The LCR

The LCRLiquidity Coverage Ratio: the stock of HQLA over net cash outflows in a standard 30-day stress. At least 100% in normal times. divides the buffer of L3.5.06: The liquidity buffer, £13.7bn, by net cash outflowsNet cash outflows: stressed 30-day outflows less inflows, with inflows counted only up to 75% of outflows.. Demand deposits run at their rate on the whole balance; term funding counts only the part maturing within 30 days.

The £32.0bn of retail demand deposits, half the balance sheet, produce only £2,100m of outflow. The £2,400m of short-term deposits from banks and funds produce £2,400m, the single largest line. Wholesale funding is where the LCR is won and lost.

The NSFR

The NSFRNet Stable Funding Ratio: available stable funding over required stable funding, a one-year view of the funding structure. At least 100%. compares available stable fundingAvailable stable funding: each liability and capital line times a factor for how likely it is to stay for a year. with required stable fundingRequired stable funding: each asset and off-balance-sheet line times a factor for how much of it needs stable funding.. Each line's factor depends on its residual maturity, so the effective factor below is a blend.

Retail deposits supply £35.5bn of the £52.4bn; mortgages need £21.0bn of the £35.7bn. The NSFR is a picture of the business model: a retail-funded mortgage lender passes easily; a bank lending long on short wholesale money does not.

What moves them

Four actions, £1bn each, recomputed on the book:

Terming out helps both ratios most: it takes a 100% outflow out of the LCR and turns 0% ASF into 100%. Buying HQLA moves the LCR by 11.5 points per £1bn, but an outflow saved moves it by 18.1: with the ratio above 100%, shrinking the denominator does more than growing the numerator. Cancelling credit lines barely registers (10% LCR, 5% RSF), which is why banks rarely bother. Losing insured deposits to wholesale money is the action that hurts.

Managing to them

Treasury forecasts both ratios forward, because they move without anyone acting. Funding drifts into the LCR's 30-day window as time passes: the book's £1,300m of CP and CDs maturing after 30 days becomes an LCR outflow, line by line, as each issue gets close. A bond with 13 months left counts 100% in the NSFR; two months later, with under a year left, it counts 50%. Treasury watches these cliffsA date when a large amount of funding falls due at once, or falls inside a ratio's horizon., spreads maturities, and charges business lines for the liquidity they use through funds transfer pricing (L3.5.11: Pricing liquidity). Limits are set on the ratios and on the stress test, with early warnings well above 100%.

Why 100% is a floor, not a target

With HQLA $H$, outflows $O$, inflows $I$ and net outflows $N = O - \min(I,\ 0.75\,O)$, the LCR is $H / N$. A change moves it by percentage points (M-A01: Percentages):

So £1bn of HQLA adds $1{,}000 / 8{,}705 = 11.5$ points, and £1bn less net outflow adds about $1.574 \times 1{,}000 / 8{,}705 = 18.1$ points: the outflow lever is stronger by the factor $H/N$, the ratio itself. The NSFR works the same way with $A/R$: £1bn of ASF adds 2.8 points and £1bn less RSF about 4.1.

Points and percent. A move from $r_0$ to $r_1$ is $r_1 - r_0$ percentage points but $r_1 / r_0 - 1$ percent. PointsPercentage points: the difference between two percentages, as opposed to the percentage change in one. are the convention for ratios.

Surplus. The amount the bank could lose before hitting the floor:

Pull the four levers and watch both ratios against the 100% line. Compare £1bn of terming out with £1bn of gilts; then lose £5bn of insured deposits and see how close the LCR comes to the floor.

Treasury proposes two things: term out £1.0bn of the deposits from banks and funds that mature within 30 days into 3-year senior bonds, and cancel £2.0bn of undrawn credit lines that corporate clients barely use.

The Basel LCR was phased in from a 60% minimum on 1 January 2015, rising 10 points a year to 100% on 1 January 2019; the NSFR was due to become a minimum standard by 1 January 2018. National versions differ in detail and timing. In the euro area, significant banks reported an aggregate LCR of 153.9% and NSFR of 125.6% in the first quarter of 2026 (ECB supervisory banking statistics, June 2026): well above the floor, as this lesson argues they should be. The full rules, national implementation, disclosure and supervisory review are in M4.5: Liquidity and IRRBB regulation.

• The book's LCR is 157.4% (£13.7bn over £8.71bn) and its NSFR 146.7% (£52.4bn over £35.7bn).
• Short-term wholesale funding drives the LCR; the business model (retail deposits against long mortgages) drives the NSFR.
• Above 100%, an outflow saved moves the LCR more than HQLA added: here 18.1 against 11.5 points per £1bn.
• Terming out wholesale funding helps both ratios; buying HQLA helps mainly the LCR; cancelling committed lines barely moves either.
• Ratios are reported in percentage points; a change in points is not the same as a percentage change.
• 100% is a floor: banks hold a management buffer so the HQLA can be used in a stress, and their own stress tests usually need more.

Liquidity Coverage Ratio (LCR)

Liquidity Coverage Ratio: the stock of HQLA over net cash outflows in a standard 30-day stress. At least 100% in normal times.

Net cash outflows

Net cash outflows: stressed 30-day outflows less inflows, with inflows counted only up to 75% of outflows.

Net Stable Funding Ratio (NSFR)

Net Stable Funding Ratio: available stable funding over required stable funding, a one-year view of the funding structure. At least 100%.

Available stable funding (ASF)

Available stable funding: each liability and capital line times a factor for how likely it is to stay for a year.

Required stable funding (RSF)

Required stable funding: each asset and off-balance-sheet line times a factor for how much of it needs stable funding.

Term out

Replace short-term funding with funding of longer maturity, usually at a higher cost.

Percentage points

Percentage points: the difference between two percentages, as opposed to the percentage change in one.

Management buffer

A margin a bank keeps above a regulatory minimum by its own choice, so ordinary swings never take it below.

Funding cliff

A date when a large amount of funding falls due at once, or falls inside a ratio's horizon.