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FRM Part II · FRM Exam Part II · The Investment Function in Financial Services Management

A bank has USD 500 million of HQLA and net 30-day stressed outflows of USD 400 million, giving an LCR of 125%. Management plans to sell USD 100 million of HQLA securities and lend the proceeds in a 6-month loan that does not change net outflows. What happens to the LCR and what is the best interpretation?

LCR falls to 100%, exactly meeting the minimum. HQLA drops from 500 million to 400 million because the new loan is not HQLA eligible, while net outflows remain 400 million, so 400 divided by 400 equals 100%, leaving no buffer above the requirement.

  1. ALCR falls to 100%, which just meets the minimum of 100%Correct
  2. BLCR falls to 80%, a breach of the minimum
  3. CLCR stays at 125% because the sale is only an asset swap
  4. DLCR rises to 150% because the loan earns more income

Explanation

HQLA falls to 500 - 100 = 400. Net outflows remain 400. LCR = 400/400 = 100%, exactly the minimum. Option B wrongly divides by 500. Option C ignores that the loan is not HQLA. Option D reverses direction.

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