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FRM Part II · FRM Exam Part II · Solvency, Liquidity and Other Regulation After the Global Financial Crisis

A bank's treasurer is asked what the Liquidity Coverage Ratio (LCR) under Basel III is designed to ensure. Which statement is correct?

The LCR requires a bank to hold enough unencumbered high-quality liquid assets to cover its total net cash outflows over a 30-day stressed period, with the ratio at least 100%. The one-year stable funding horizon belongs to the NSFR.

  1. AThe bank holds enough unencumbered high-quality liquid assets to cover net cash outflows over a 30-day stress periodCorrect
  2. BThe bank funds its long-term assets with stable funding over a one-year horizon
  3. CThe bank holds a minimum amount of Tier 1 capital relative to total exposure
  4. DThe bank limits its largest exposure to a single counterparty

Explanation

The LCR is a short-term resilience measure: stock of HQLA divided by total net cash outflows over 30 calendar days under stress must be at least 100%. The one-year horizon describes the NSFR, not the LCR. Capital and large exposure limits are separate regimes.

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