Liquidity Coverage at Risk

Giacomo Morelli, Virginia Pugliese and Paolo Santucci de Magistris

Quantitative Finance, 2025, vol. 25, issue 2, 291-306

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.

Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
http://hdl.handle.net/10.1080/14697688.2025.2457366 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:quantf:v:25:y:2025:i:2:p:291-306

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/RQUF20

DOI: 10.1080/14697688.2025.2457366

Access Statistics for this article

Quantitative Finance is currently edited by Michael Dempster and Jim Gatheral

More articles in Quantitative Finance from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().