Gearing and Liquidity Coverage Ratio: Difference between pages

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1.  
''Bank regulation''.


''Financial gearing'' measures the relative amount of debt in a firm's capital structure.
(LCR).


Gearing ratios can be calculated in several different ways, so consistency of approach is important.
The LCR is a requirement under Basel III for a bank to hold high-quality liquid assets (HQLAs) sufficient to cover 100% of its net cash requirements over 30 days.  


Two essential bases to define are:
It applies throughout the European Union.


i. The use of book or market values.
The LCR has been implemented in stages from 2015, to reach the 100% requirement by January 2019.  


ii. The use of Debt divided by Equity (D/E) or of Debt divided by Debt plus Equity = D/[D+E].


It reduces the value to a bank of cash deposits of less than 30 days tenor because they are only worth the income on the HQLAs if a bank forecasts no short term cash receipts to cover repayment.


Historically, use of the D/E version of the measure was more common in the UK.
The purpose of this requirement is to ensure that banks can manage stressed market conditions, under which the bank is assumed to suffer substantial outflows of the cash previously deposited with it.
 
With respect to the Debt figure, practice varies in including or excluding certain items such as cash, short term borrowings, leases, pensions and other provisions.
 
Practitioners may also adjust the Equity figure, for example to exclude intangible assets.
 
 
2.
 
''Operational gearing'' relates to the operating costs of a business, and measures the relative proportions of fixed and variable operating costs.
 
 
3.
 
'Gearing up' refers to increasing the levels of financial or operation gearing - or both - within an organisation.
 
The intention of gearing up is to improve expected net results. 
 
The consequence of gearing up is normally to increase risk.
 
Many financial disasters have been a consequence of gearing up (or leveraging) excessively in this way in earlier periods.




== See also ==
== See also ==
* [[Debt equity ratio]]
* [[Basel III]]
* [[Debt to equity ratio]]
* [[European Union]]
* [[Intangible assets]]
* [[Net Stable Funding Ratio]]
* [[Leverage]]
* [[Cash investing in a new world]]
* [[Leveraged]]
* [[HQLA]]
* [[Leveraged takeover]]
* [[Level 1 liquid assets]]
* [[Levered]]
* [[Level 2 liquid assets]]
* [[MCT]]
* [[Leverage Ratio]]
* [[Off-balance sheet finance]]
* [[Liquidity buffer]]
* [[Ungeared]]
* [[Liquidity risk]]
* [[Ungeared cash flow]]
* [[LR]]
 
* [[OLAR]]
 
* [[Pillar 1]]
==Other links==
* [[Required Stable Funding]]
[http://www.treasurers.org/node/8012 Masterclass: Measuring financial risk, The Treasurer, July 2012]
* [[Survival period]]


[[Category:Corporate_finance]]
[[Category:Compliance_and_audit]]
[[Category:Liquidity_management]]

Revision as of 11:55, 17 November 2016

Bank regulation.

(LCR).

The LCR is a requirement under Basel III for a bank to hold high-quality liquid assets (HQLAs) sufficient to cover 100% of its net cash requirements over 30 days.

It applies throughout the European Union.

The LCR has been implemented in stages from 2015, to reach the 100% requirement by January 2019.


It reduces the value to a bank of cash deposits of less than 30 days tenor because they are only worth the income on the HQLAs if a bank forecasts no short term cash receipts to cover repayment.

The purpose of this requirement is to ensure that banks can manage stressed market conditions, under which the bank is assumed to suffer substantial outflows of the cash previously deposited with it.


See also

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