A bank holds level 1 and level 2A liquid assets against retail and corporate deposits with different 30-day run-off rates. Compute its liquidity coverage ratio and find the cheapest fix if it falls short.

The LCR is 79.3%, Rs 3,050 crore short of 100%, and other corporate deposits drive 56% of the outflows. Liquid assets are Rs 11,700 crore against Rs 14,750 crore of net outflows. The cheapest illustrative fix is to issue Rs 3,050 crore of 91-day certificates and hold the cash in treasury bills, about Rs 18 crore a year. Buying bonds with money that falls due inside 30 days cannot fix it at any size.

It asks whether the bank could survive a month of stress on its own cash. A household that keeps three months of expenses in a savings account can lose a job without selling the house. The liquidity coverage ratioHigh-quality liquid assets divided by net cash outflows over a 30-day stress; at 100% the bank can meet a month of stressed outflows from assets it can sell or pledge at once. divides assets that can be turned into cash immediately by the cash that would leave in a 30-day stress, net of what comes in. Each deposit type gets a run-off rate for how likely it is to leave.

Liquid assets: Rs 10,000 crore of level 1 plus Rs 2,000 crore of level 2A after a 15% haircut, Rs 11,700 crore. Outflows: Rs 2,000 crore from stable retail, Rs 2,000 crore from less stable retail, Rs 3,750 crore from operational corporate and Rs 10,000 crore from other corporate, Rs 17,750 crore. Less Rs 3,000 crore of inflows, net outflows are Rs 14,750 crore, and the LCR is 11,700 over 14,750, 79.3%. Level 2A is 14.5% of liquid assets, inside the usual cap, and inflows are well below the usual 75% ceiling.

Weight each deposit by its run-off rate, not its size. Stable retail deposits are 40% of deposits but produce 11% of outflows; other corporate deposits are 25% of deposits and produce 56% of outflows. A rupee of corporate money that is not tied to the customer's day-to-day payments is assumed to leave eight times as fast as a rupee of stable retail money. That is why banks pay up for retail deposits even when wholesale money is cheaper.

Test each fix on both halves of the ratio. Issuing Rs 3,050 crore of 91-day certificates adds that much to liquid assets and nothing to 30-day outflows, reaching 100% for about Rs 18.3 crore a year at a 0.6% carry cost. Paying other corporate depositors 0.5% to lock money beyond 30 days works too, but each rupee removes only 40 paise of outflow, so Rs 7,625 crore must move, about Rs 38.1 crore a year. Buying bonds with money that matures inside 30 days adds the same amount to both sides and can never lift a ratio below 100% to 100%.

Close with the catch in the cheapest route. A 91-day certificate falls inside the 30-day window after 61 days, so the bank must keep rolling a ladder of them, and the cost rises if its name weakens. The durable fix is the deposit mix: shifting corporate balances into operational accounts and growing retail deposits lowers the requirement for good.