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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 reviewing the purpose of the Basel III Liquidity Coverage Ratio (LCR). Which statement best describes what the LCR requires?

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

  1. AEnough unencumbered high-quality liquid assets to cover total net cash outflows over a 30-day stressed periodCorrect
  2. BEnough stable funding to cover the liquidity profile of assets and off-balance-sheet exposures over one year
  3. CA minimum ratio of Tier 1 capital to total exposure measure, including off-balance-sheet items
  4. DEnough capital to absorb unexpected credit losses at a 99.9% confidence level over one year

Explanation

The LCR is a short-term measure: the stock of unencumbered HQLA must be at least equal to total net cash outflows over a 30-calendar-day stress scenario, giving a ratio of at least 100%. The one-year stable funding concept describes the NSFR, not the LCR.

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