HQLA Assets: Tiers, Haircuts, and LCR Requirements

High-Quality Liquid Assets, or HQLA, are the cash and near-cash holdings that certain large banks must keep available so they can survive a 30-day financial stress period without running out of money. Federal regulations sort qualifying HQLA assets into three tiers, apply progressively larger discounts (haircuts) to lower tiers, and cap how much of the total can come from anything other than the safest instruments. The point of the framework is a single number: the Liquidity Coverage Ratio (LCR), which must stay at 1.0 or higher, meaning the bank’s adjusted HQLA fully covers its projected net cash outflows over the next 30 days.¹

The Three Tiers of HQLA

Not every liquid asset is treated the same. Regulators sort qualifying holdings into Level 1, Level 2A, and Level 2B, with each step down carrying a larger haircut and tighter limits. The logic is simple: the less certain an asset’s value will be in a crisis, the less credit the bank gets for holding it.

Level 1 Assets

Level 1 is the safest tier. These assets count at full market value with no cap on how much a bank can hold. Under the Federal Reserve’s LCR rule, Level 1 includes:

Federal Reserve Bank balances
Foreign withdrawable reserves held at foreign central banks
U.S. Treasury securities, and other securities unconditionally guaranteed by the Treasury
Other full-faith-and-credit U.S. government securities, such as Ginnie Mae obligations, provided they are liquid and readily marketable
Qualifying sovereign and supranational securities issued by foreign sovereigns, the Bank for International Settlements, the IMF, the European Central Bank, or multilateral development banks, provided they carry a zero percent risk weight and a proven track record as reliable liquidity sources during stressed markets

The last category explicitly excludes obligations of financial sector entities, which keeps bank-issued debt out of Level 1 no matter how strong the issuer’s credit.²

Level 2A Assets

Level 2A is high quality but carries somewhat more market risk than Level 1. In U.S. banking, the most common examples are securities issued by government-sponsored enterprises like Fannie Mae and Freddie Mac. These agencies do not carry the full faith and credit of the U.S. government, which is why their securities sit one tier below Treasuries. Certain sovereign and multilateral development bank securities with a 20% risk weight also qualify.²

Level 2A assets take a 15% haircut. Only 85% of their fair market value counts toward the HQLA total.³

Level 2B Assets

Level 2B is the riskiest tier that still qualifies. In the U.S. framework, this tier covers investment-grade corporate debt securities and publicly traded common equity that is part of a major stock index. Both get a 50% haircut, so only half the market value counts.⁴ The international Basel framework allows certain residential mortgage-backed securities to qualify as Level 2B at a 25% haircut, but U.S. regulators did not adopt that option.³

Both the debt and equity in this tier must meet strict liquidity and credit-quality tests. An illiquid corporate bond or a thinly traded stock won’t qualify regardless of the issuer’s rating.

Haircuts, Caps, and How the Final HQLA Number Is Built

Haircuts are only half the story. Two caps prevent banks from leaning too heavily on lower-quality tiers:

After haircuts, Level 2A and Level 2B combined cannot make up more than 40% of total HQLA.
After haircuts, Level 2B alone cannot exceed 15% of total HQLA.

The Basel framework states both caps directly.³ U.S. regulations implement them through excess-amount formulas rather than plain percentages. The Level 2 cap excess equals the greater of zero or the combined Level 2 amounts minus two-thirds of the Level 1 amount, and any positive excess is subtracted from the HQLA total.⁵

A simplified example. Say a bank holds $600 million in Level 1 assets, $300 million in Level 2A (before haircut), and $100 million in Level 2B (before haircut). After haircuts, Level 2A counts as $255 million (85% of $300 million) and Level 2B counts as $50 million (50% of $100 million). The preliminary HQLA total is $905 million. Now check the caps: combined Level 2 ($305 million) must stay at or below 40% of the total, and Level 2B ($50 million) at or below 15%. If either cap binds, the excess gets subtracted, reducing the final adjusted HQLA figure.

Operational Requirements for Eligible HQLA

Owning the right securities is not enough on its own. A bank has to prove those assets can actually be turned into cash when a crisis hits. The operational requirements are where regulators separate real liquidity buffers from paper ones.

Assets must be unencumbered. Anything pledged as collateral, held in segregated client accounts, or otherwise restricted does not count.
Assets must be controlled by the function responsible for managing liquidity risk, either segregated as a liquidity reserve or demonstrably available to that function without conflicting with other business strategies.
The bank must have procedures and systems in place to sell or repo the assets at any time, and must periodically test this by actually monetizing a sample that reflects the composition of its HQLA portfolio.
Eligible assets must be appropriately diversified by asset type, counterparty, issuer, and currency.
Assets earmarked to cover the bank’s own operating costs do not qualify.

If a hedging transaction offsets the risk of an HQLA asset, the bank must reduce that asset’s fair value by the cash outflow that would result from unwinding the hedge.⁵ That keeps a bank from booking a hedged bond at full value while ignoring what it would cost to unwind the hedge.

Which Banks Have to Hold HQLA

The LCR requirement does not apply to every bank. Federal regulations impose it on the largest and most interconnected institutions:

Global systemically important bank holding companies (GSIBs) and their insured depository institution subsidiaries
Category II institutions (generally $700 billion or more in total assets, or $75 billion in cross-jurisdictional activity)
Category III institutions (generally $250 billion or more in total assets, or meeting certain risk-related thresholds)
Category IV institutions with $50 billion or more in average weighted short-term wholesale funding
Covered nonbank companies designated by the Financial Stability Oversight Council

The Federal Reserve Board can also extend the requirement to any institution whose size, complexity, or risk profile warrants it.⁶ Category IV institutions that hit the threshold calculate their LCR on the last business day of each month rather than daily, a meaningful operational break for mid-size banks.¹ Smaller community and regional banks outside these categories are not subject to the LCR at all.

What Happens If the LCR Drops Below 100%

A bank whose LCR falls below the minimum has to notify its primary federal regulator the same business day. If the ratio stays below 100% for three consecutive business days, the bank must submit a remediation plan explaining how it will get back into compliance. Monthly filers must consult with their regulator immediately when a month-end LCR comes in short.⁷

A shortfall does not trigger an automatic penalty. Regulators apply supervisory judgment, weighing whether the breach is temporary, driven by an unusual event, part of a pattern, or the result of operational failures. Responses range from heightened monitoring to formal enforcement action, and the shortfall reports and supervisory responses are treated as confidential supervisory information.⁷

How HQLA Connects to the Net Stable Funding Ratio

The LCR is a 30-day measure. Banks subject to it also face a longer-horizon requirement called the Net Stable Funding Ratio (NSFR), which asks whether the bank’s funding structure is sustainable over a full year. The two ratios interact directly: HQLA holdings require less stable funding under the NSFR because they can be sold or pledged relatively easily. Level 1 assets carry a 5% required stable funding factor, Level 2A carries 15%, and Level 2B carries 50%.⁸

One quirk worth flagging. For NSFR purposes, all assets that meet the HQLA definitions count at their full classification level without the LCR’s 40% and 15% caps. A bank whose Level 2B holdings exceed the LCR cap still gets NSFR credit for them as HQLA. The two ratios run in parallel, and managing them at the same time is one of the more involved pieces of bank treasury work.⁸

1
eCFR. 12 CFR 249.10 – Liquidity Coverage Ratio
2
eCFR. 12 CFR 249.20 – High-Quality Liquid Asset Criteria
3
Bank for International Settlements. LCR30 – High-Quality Liquid Assets
4
eCFR. 12 CFR 249.21 – High-Quality Liquid Asset Amount
5
eCFR. 12 CFR Part 329 – Liquidity Risk Measurement Standards
6
eCFR. 12 CFR 249.1 – Purpose and Applicability
7
Office of the Comptroller of the Currency. Liquidity Coverage Ratio Final Rule
8
Bank for International Settlements. Basel III – The Net Stable Funding Ratio