Statutory Liquidity Ratio (Slr)
The statutory liquidity ratio (SLR) is a measure of the liquidity of a bank, which is the ability of a bank to meet its current liabilities in full.
Definition:The statutory liquidity ratio (SLR) is a required ratio of deposits to liquid assets that banks must maintain in order to ensure depositors’ funds are available in times of need.
Purpose:– To maintain confidence in the banking system- To prevent bank failures- To ensure that banks have sufficient liquidity to meet their obligations to depositors
Requirement:Banks are required to maintain an SLR at a specified level by their respective regulators. The required SLR varies between countries, but typically ranges between 20% and 40%.
Components of Statutory Liquidity Ratio:The SLR is calculated by dividing a bank’s liquid assets by its total deposits. Liquid assets include cash on hand, deposits in other banks, and securities that can be easily converted into cash. Total deposits include all deposits from customers, including savings accounts, checking accounts, and money market funds.
Formula:SLR = (Liquid Assets / Total Deposits) x 100%
Exclusions:Certain assets are not included in the calculation of the SLR, such as loans to other banks, investments in government securities, and certain other investments.
Impact:The SLR has a direct impact on the cost of borrowing for banks. If a bank exceeds its required SLR, it can borrow money from other banks at a cost. If a bank falls below its required SLR, it may be subject to fines or other penalties.
Example:If a bank has total deposits of $10 million and liquid assets of $2 million, its SLR would be 20%.
Additional Notes:– The SLR is a key liquidity ratio used in many countries.- The SLR is typically adjusted periodically by central banks to manage interest rates and overall liquidity in the banking system.- The SLR is a measure of a bank’s liquidity risk.
