Many banks tend to fund long-term lending commitments with short-term debt, hence creating a shortage of liquidity. The Liquidity Coverage Ratio was introduced to ensure banks have sufficient highly liquid assets to meet their short-term financial obligations.
Key learning objectives:
Discuss the different types of HQLA and the conditions in which they are traded
Explain the potential drawbacks of having a surplus of liquidity
Understanding the importance of Deposit Insurance Schemes, such as the FSCS in protecting deposits