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FRM Part II · FRM Exam Part II · Liquidity Risk

A bank's treasury team is reviewing the Basel III Liquidity Coverage Ratio (LCR). Which statement best describes what the LCR is designed to ensure?

The LCR requires a bank to hold enough unencumbered high-quality liquid assets to cover its total net cash outflows over a 30-day stress period. It is a short-term measure with a 100% minimum, unlike the NSFR, which addresses one-year structural funding.

  1. AThe bank holds enough unencumbered high-quality liquid assets to cover net cash outflows over a 30-day stress scenarioCorrect
  2. BThe bank funds its long-term assets with stable funding over a one-year horizon
  3. CThe bank holds capital equal to at least 8% of risk-weighted assets
  4. DThe bank limits its total exposure to any single counterparty to 25% of Tier 1 capital

Explanation

The LCR is a short-term resilience measure: stock of HQLA divided by total net cash outflows over the next 30 calendar days under stress, with a minimum of 100%. The one-year stable funding concept describes the NSFR, not the LCR.

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