Balancing level 1 and level 2 assets is key: level 1 offers superior liquidity but lower returns, while level 2 enhances yield but comes with regulatory haircuts. The ideal mix depends on each bank's risk profile and funding model.
Banks can strengthen their liquidity-coverage ratios (LCR) by diversifying funding sources, strategically managing high-quality liquid assets (HQLA) and employing advanced treasury practices. A resilient HQLA portfolio requires a balanced mix of assets across maturities, types, currencies and issuers, while monitoring concentration risks to avoid market-specific shocks.
Asset selection should consider not just yield but also market depth, price volatility and eligibility for use in central-bank operations.
