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FRM Part II · FRM Exam Part II · Liquidity Risk Management

A bank's liquidity coverage ratio (LCR) is designed to ensure that it can withstand a specific stress scenario. Which description of the LCR is correct under Basel III?

The LCR is the stock of unencumbered high-quality liquid assets divided by total net cash outflows over a 30-day stress period, and it must be at least 100%. The NSFR is the one-year structural ratio, which is why the available-to-required stable funding description is wrong.

  1. AStock of unencumbered high-quality liquid assets divided by total net cash outflows over the next 30 calendar days, with a minimum of 100%Correct
  2. BAvailable stable funding divided by required stable funding over a one-year horizon, with a minimum of 100%
  3. CStock of high-quality liquid assets divided by total assets, with a minimum of 3%
  4. DStock of high-quality liquid assets divided by total net cash outflows over the next 90 days, with a minimum of 80%

Explanation

The LCR compares unencumbered HQLA with net cash outflows over a 30-day stress period and must be at least 100%. Option B describes the NSFR, which is a one-year structural measure. Options C and D use wrong horizons or thresholds.

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