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

A bank's treasury team is explaining the Basel III Liquidity Coverage Ratio (LCR) to new risk analysts. Which statement correctly describes the LCR?

The LCR equals the stock of high-quality liquid assets divided by total net cash outflows over a 30-day stress period, and it must be at least 100%. The one-year available over required stable funding measure is the NSFR, not the LCR.

  1. AStock of high-quality liquid assets divided by total net cash outflows over the next 30 calendar days, required to be at least 100%Correct
  2. BAvailable stable funding divided by required stable funding over a one-year horizon, required to be at least 100%
  3. CStock of high-quality liquid assets divided by total assets, required to be at least 10%
  4. DTotal net cash outflows over 30 days divided by the stock of high-quality liquid assets, required to be below 100%

Explanation

The LCR compares the stock of unencumbered HQLA with total net cash outflows under a 30-day stress scenario, and must be at least 100%. The one-year stable funding ratio is the NSFR, which is the key distractor. The other options invert or misdefine the ratio.

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