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FRM Part II · FRM Exam Part II · Liquidity Stress Testing

A bank's treasury head explains that the Basel III Liquidity Coverage Ratio (LCR) is designed to ensure survival over a specific stress horizon. Which description of the LCR is correct?

The LCR equals the stock of unencumbered high-quality liquid assets divided by total net cash outflows over a 30-day stress scenario, with a minimum of 100%. The one-year stable funding comparison is the NSFR, a separate structural measure.

  1. AStock of unencumbered high-quality liquid assets divided by total net cash outflows over the next 30 calendar days under a stress scenarioCorrect
  2. BAvailable stable funding divided by required stable funding over a one-year horizon
  3. CStock of high-quality liquid assets divided by total assets, measured at each quarter-end
  4. DNet cash outflows over 90 days divided by Tier 1 capital

Explanation

The LCR compares unencumbered HQLA with net cash outflows over a 30-day stress period and must be at least 100%. The one-year available/required stable funding ratio describes the NSFR, not the LCR.

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