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FRM Part II · FRM Exam Part II · Liquidity Risk Management

A bank's treasury team is reviewing 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-calendar-day stress scenario, giving a minimum ratio of 100%. The one-year stable funding comparison describes the NSFR instead.

  1. AStock of unencumbered high-quality liquid assets must be at least equal to total net cash outflows over a 30-calendar-day stress periodCorrect
  2. BAvailable stable funding must be at least equal to required stable funding over a one-year horizon
  3. CCommon equity Tier 1 capital must be at least equal to 4.5% of risk-weighted assets over a 30-day period
  4. DTotal wholesale funding must not exceed 50% of total liabilities over a 30-day period

Explanation

The LCR is HQLA divided by total net cash outflows over 30 days under a stress scenario, with a minimum of 100%. The option referring to available versus required stable funding over one year describes the NSFR, which is a structural longer-term measure.

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