Liquidity buffer composition describes what a bank's liquidity buffer is made of: how much is held as cash and central bank reserves, how much as government bonds, and how much as other securities. The mix matters because assets differ in how quickly and at what price they can be turned into cash under stress.
Under the Basel liquidity coverage ratio, eligible assets are ranked. Level 1 assets, mainly cash, central bank reserves and the highest-quality sovereign debt, count in full and without limit. Level 2A assets, such as certain agency and covered bonds, take a 15 per cent haircut, and Level 2B assets, such as qualifying corporate bonds and shares, take larger haircuts. Level 2 assets may form at most 40 per cent of the buffer, and Level 2B at most 15 per cent. Assets must be unencumbered and under the control of the treasury function. The mix is tested through liquidity stress testing.