Building on the Liquidity Coverage Ratio, this paper introduces the notion of Liquidity Coverage at Risk (LCRisk), which is the probability that a bank faces an illiquidity episode in the next 30 days. LCRisk is characterized by a closed-form expression and it can be derived utilizing information embedded in the bank's balance sheet, thereby capturing the close association between liquidity and the volatility of both assets and liabilities. Furthermore, the LCRisk framework enables the calculation of the liquidity buffer, indicating the necessary adjustment of liquid assets to ensure that LCRisk remains below a predetermined probability threshold. In the empirical analysis, we calculate LCRisk for a cohort of European banks, demonstrating the efficacy of this measure in serving as an early indicator of potential liquidity risks.
Liquidity Coverage at Risk / Morelli, Giacomo; Pugliese, Virginia; Santucci De Magistris, Paolo. - In: QUANTITATIVE FINANCE. - ISSN 1469-7688. - (2025).
Liquidity Coverage at Risk
Giacomo Morelli;
2025
Abstract
Building on the Liquidity Coverage Ratio, this paper introduces the notion of Liquidity Coverage at Risk (LCRisk), which is the probability that a bank faces an illiquidity episode in the next 30 days. LCRisk is characterized by a closed-form expression and it can be derived utilizing information embedded in the bank's balance sheet, thereby capturing the close association between liquidity and the volatility of both assets and liabilities. Furthermore, the LCRisk framework enables the calculation of the liquidity buffer, indicating the necessary adjustment of liquid assets to ensure that LCRisk remains below a predetermined probability threshold. In the empirical analysis, we calculate LCRisk for a cohort of European banks, demonstrating the efficacy of this measure in serving as an early indicator of potential liquidity risks.I documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.
