FRM Part II · FRM Exam Part II · Liquidity Risk
A bank has USD 80 million of high-quality liquid assets (HQLA). Over a 30-day stress period, expected outflows are USD 150 million and expected inflows are USD 70 million before any cap. Regulatory inflows are capped at 75% of outflows. What is its liquidity coverage ratio (LCR)?
The LCR is 100%. Inflows of USD 70 million are below the 75% cap of USD 112.5 million, so net outflows are USD 80 million, equal to the USD 80 million of high-quality liquid assets.
- A53%
- B100%Correct
- C114%
- D80%
Explanation
Inflow cap is 0.75 x 150 = 112.5 million, and inflows of 70 are below it, so net outflows are 150 - 70 = 80 million. LCR = 80/80 = 100%. Using gross outflows gives 53%. Applying the cap as the inflow amount gives net outflows of 37.5 million and a wrongly high ratio of about 213%.
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