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FRM Part II · FRM Exam Part II · Monitoring Liquidity

A bank's treasurer notes that its LCR is 130%, but a large part of its Level 1 securities is pledged as collateral for repo borrowing. Which treatment is consistent with the LCR framework?

HQLA must be unencumbered and available to be monetised. Securities pledged as collateral and not free to be sold or repoed should be excluded from the numerator, so the reported 130% LCR may overstate the bank's actual liquidity position.

  1. APledged securities still count if they are Level 1 assets
  2. BOnly securities pledged for over 30 days should be excluded
  3. CPledged securities count at 50% of their market value
  4. DEncumbered assets that are not available to be monetised should be excluded from HQLA, so the true LCR may be lowerCorrect

Explanation

HQLA must be unencumbered, meaning free of legal, regulatory, contractual or other restrictions on the ability to liquidate, sell, transfer or assign it. Assets pledged and not available for monetisation within the stress period do not qualify, so removing them lowers the numerator and the ratio.

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