FRM Part II · FRM Exam Part II · Monitoring Liquidity
A bank's treasury team is reviewing the Liquidity Coverage Ratio (LCR) under Basel III. Which statement correctly describes the purpose and minimum requirement of the LCR?
The LCR requires a bank to hold unencumbered high-quality liquid assets at least equal to its total net cash outflows over a 30-day stress period, giving a minimum ratio of 100%. The one-year stable funding test is the NSFR, not the LCR.
- AIt requires a stock of unencumbered high-quality liquid assets at least equal to total net cash outflows over a 30-calendar-day stress scenario, so the ratio must be at least 100%Correct
- BIt requires available stable funding to be at least equal to required stable funding over a one-year horizon
- CIt requires HQLA to cover total net cash outflows over a 90-day stress horizon with a minimum ratio of 80%
- DIt requires Tier 1 capital to be at least 3% of total exposure measure including off-balance sheet items
Explanation
The LCR is HQLA divided by total net cash outflows over the next 30 calendar days under a prescribed stress, with a minimum of 100%. The one-year stable funding comparison describes the NSFR, and the 3% Tier 1 test describes the leverage ratio.
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