After the global financial crisis, the central banks that fall within the framework of the Bank of International Settlement (BIS) set up the “Basel III” agreement in 2010. This new agreement includes more rigorous requirements for banks’ management and introduces some new ratios. One of the notable ratios is the LCR (liquidity coverage ratio), which requires a sufficient stock of unencumbered high quality liquid assets (HQLA). These assets should be easily and quickly convertible into cash in private markets to allow banks to meet their liquidity requirements in a 30 calendar-days liquidity stress scenario. Explain why such a ratio has been introduced.

What is its rationale?