FRM Part II · FRM Exam Part II · Liquidity Risk Management
A bank holds USD 400 million of high-quality liquid assets (HQLA). Under a 30-day stress, expected cash outflows are USD 700 million and expected inflows are USD 250 million, but inflows are capped at 75% of outflows. What is the resulting liquidity coverage ratio?
The liquidity coverage ratio is about 89%. Net stressed outflows are USD 700 million less USD 250 million of inflows, or USD 450 million; the inflow cap of USD 525 million does not bind. Dividing HQLA of USD 400 million by 450 million gives roughly 88.9%.
- A57%
- B89%Correct
- C100%
- D160%
Explanation
Inflow cap = 0.75 x 700 = 525, so the 250 inflow is not binding. Net outflows = 700 - 250 = 450. LCR = 400/450 = 88.9%, about 89%. Ignoring inflows gives 57%.
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