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Liquidity Coverage at Risk

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  • Giacomo Morelli
  • Virginia Pugliese
  • Paolo Santucci de Magistris

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.

Suggested Citation

  • Giacomo Morelli & Virginia Pugliese & Paolo Santucci de Magistris, 2025. "Liquidity Coverage at Risk," Quantitative Finance, Taylor & Francis Journals, vol. 25(2), pages 291-306, February.
    • Handle: RePEc:taf:quantf:v:25:y:2025:i:2:p:291-306
    DOI: 10.1080/14697688.2025.2457366
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