ABSTRACT
The rationale for the introduction of a net stable funding ratio is the experience made during the great financial crisis of the fragility of funding structures by banks and other financial institutions. If an institution has government bonds, it can fulfil the liquidity coverage ratio (LCR) while at the same time entering into a risky transaction. So the incentive to have one's cake and eat it is very high. If an institution has government bonds, it can fulfil the LCR while at the same time entering into a risky transaction. The numerator of the LCR is the stock of High Quality Liquid Assets. The denominator calculates in detail the runoff rates for any security. European Banking Authority studies on the possibility of implementing the LCR in the European Union found that the banks would have had no difficulty in meeting the ratio as they were holding plenty of sovereign bonds and reserves at the central bank.
