Published November 14, 2026 · By Henry Palma

What Is Liquidity Risk? Deposit Runs, the Cash Buffer & the LCR

Liquidity risk is whether you can pay cash today. See how fast a deposit run can move, the LCR and NSFR, and why backup lines must be pledged and tested.

Liquidity risk is a different question from capital. Capital asks whether you can absorb losses. Liquidity asks whether you can pay cash today. A bank can be solvent on paper and still close its doors if the cash isn't there. This post explains liquidity risk in plain English, using a fictional regional bank, Ridgeway Regional, and the 2023 failure of Silicon Valley Bank as the real-world warning.

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Capital keeps you solvent. Cash keeps you open.

Ridgeway Regional Bank is fictional, and we use it for teaching. It has about $9 billion in assets and $7.5 billion of deposits: $5 billion insured, and $2.5 billion above the insurance limit. It has $6 billion of loans, which are hard to turn into cash quickly. And it holds $400 million of cash at the Federal Reserve, plus $2 billion of bonds.

It's 8:15 in the morning, and treasury calls. Big depositors are moving money out. The question on the table: if they keep pulling cash today, can we pay every one of them?

How fast a run can move

Silicon Valley Bank, or SVB, shows the speed. At the end of 2022, about 94% of its deposits were uninsured: above the $250,000 that the Federal Deposit Insurance Corporation, the FDIC, insures. On March 8, 2023, it sold bonds at a loss of $1.8 billion and announced a plan to raise capital. On March 9, depositors pulled $42 billion, about a quarter of all deposits, in one day. On March 10, another $100 billion was queued to leave, and regulators closed the bank.

The spirit: a run is a liquidity event, and today it moves at the speed of a phone app.

What makes deposits run? Three warning signs. First, the uninsured share. At Ridgeway, $2.5 billion of $7.5 billion, a third, is above the insurance limit. Second, concentration: depositors from one industry talk to each other, and they move together. Third, hidden bond losses, called unrealized losses. They only become real if you're forced to sell, which is exactly what happens in a run.

The cash buffer and the LCR

The cash buffer has a name: HQLA, which stands for high-quality liquid assets. Those are things you can turn into cash fast, without big losses. Level 1 counts at full value: cash, reserves at the Fed, and U.S. Treasuries. Level 2A, like bonds from government-sponsored agencies, takes a 15% haircut, meaning it counts at 85% of its value. Level 2B, like some corporate bonds and stocks, counts at only half. And the lower levels are capped, so most of the buffer has to be top quality.

The big-bank yardstick is the LCR, the liquidity coverage ratio. It divides the HQLA buffer by the net cash that would leave in a 30-day stress. The rule wants at least 100%.

Ridgeway's buffer is $1.2 billion: $400 million of cash plus $800 million of Treasuries that aren't pledged elsewhere. Its 30-day stress outflow is also $1.2 billion. So coverage is 100%: just enough, with nothing to spare.

Where does that $1.2 billion of outflow come from? Uninsured deposits: $2.5 billion, and we assume 30% leave. That's $750 million. Insured deposits: $5 billion, and 5% leave. That's $250 million. And businesses draw on their credit lines: 20% of $1 billion is $200 million. The total is $1.2 billion, and uninsured money is 63% of it. Those run-off rates are illustrative, not the rule's.

Now run it at SVB speed. Suppose a quarter of Ridgeway's deposits leave in one day. That's about $1.9 billion. The buffer on hand is $1.2 billion. That leaves a gap of about $700 million that has to be borrowed the same day. So a bank can pass a 30-day test and still break in a one-day run.

The NSFR, and who must meet the ratios

The second ratio is the NSFR, the net stable funding ratio. Think of the LCR as a sprint: survive a 30-day stress, with the cash buffer divided by stress outflows, at 100% or more. The NSFR is the marathon: stay funded for a full year. It divides stable funding, like equity and sticky deposits, by the funding your assets need. Again, at least 100%.

So who actually has to meet these ratios in the U.S.? The largest, global banks: the full 100%, for both. Banks of $250 billion and up: 100%, or 85% if they rely less on short-term wholesale funding, meaning quick money from big institutional lenders. Banks from $100 billion to $250 billion: 70%, but only if they use at least $50 billion of that funding. Otherwise, none. And banks under $100 billion, like Ridgeway: neither ratio applies.

But no ratio doesn't mean no rules. A 2010 interagency policy statement expects every bank to manage funding and liquidity risk. A July 2023 addendum, written after SVB, tells banks to keep a contingency funding plan and be ready to borrow from the Fed. And examiners rate liquidity in every exam. The spirit: size changes the paperwork, not the question. Can you pay everyone who asks?

The cash ladder

Where does backup cash come from? First, FHLB advances. FHLB stands for Federal Home Loan Bank. These are member-owned banks that lend to their members against loans and bonds. Second, the Federal Reserve's discount window. Sound banks can borrow overnight or for up to 90 days, against collateral they've pledged. Third, the market: repo, which means borrowing against your bonds, and brokered deposits, bought through brokers.

Here's Ridgeway's cash ladder. Cash at the Fed: $400 million. Repo on the unpledged Treasuries: $800 million. Those two make up the buffer: $1.2 billion. The discount window: $800 million, but only because the collateral is already pledged. And an FHLB advance: $1 billion, if Ridgeway asks before the cutoff. All of it can arrive the same day: $3 billion, against a one-day run of $1.9 billion, if the plumbing works.

What could change next

In March 2026, Treasury and Fed leaders called for a reset of the LCR. The main idea is to give capped credit for borrowing capacity at the discount window, backed by collateral that's already pledged. The goal is less hoarding of cash, and more practice using the Fed before a crisis. As of mid-November 2026, that reset has only been discussed. It is not a final rule.

The contingency funding plan

Every bank needs a contingency funding plan, or CFP. That's the written playbook for raising cash in a crisis. It has five parts:

Early-warning triggers that start the plan.
Stress scenarios: mild and severe, for trouble at just your bank and for trouble across the market.
Funding sources ranked by speed and amount.
Who decides, who calls whom, and what you tell depositors.
Test it: draw on the lines and run drills.

Triggers turn the plan into action. On Ridgeway's dashboard, if more than 1% of deposits, about $75 million, leave in a day, treasury alerts the chief financial officer. More than 3% in five days, about $225 million, and the plan is activated. And if the buffer drops below 100% of the 30-day outflow, Ridgeway borrows and rebuilds it.

Five ways liquidity plans fail

Assuming depositors are loyal.
Collateral that was never pledged, and lines that were never tested.
Counting bonds at full value and ignoring the losses.
Planning for a month when the run takes a day.
Nobody has practiced the message to depositors.

What this means for a regional bank

First, know who could leave: uninsured and concentrated deposits. Second, cash you can't reach today isn't liquidity today. Third, pledge collateral now, and test the Fed and Home Loan Bank lines. And fourth, stress capital and liquidity together, not in silos.

Five questions to ask your team

How much could leave in a single day?
How much cash can we raise by 3 PM today?
Is our collateral already pledged at the Fed?
When did we last test our borrowing lines?
And what triggers our contingency funding plan, and who pulls it?

Recap

Capital keeps you solvent, and cash keeps you open. SVB lost $42 billion, a quarter of its deposits, in one day. The LCR is the 30-day sprint, and the NSFR is the one-year marathon. Neither ratio applies below $100 billion, but every bank needs a contingency funding plan. And for backup lines: pledge it, test it, before you need it.

Watch more Bank Risk Decoded videos on the Bank Risk Decoded YouTube channel.