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

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

The LCR ensures a bank holds enough unencumbered high-quality liquid assets to cover total net cash outflows over a 30-day stress scenario. The one-year available versus required stable funding comparison is the NSFR, and the capital-to-exposure measure is the leverage ratio.

  1. AThe bank holds enough unencumbered high-quality liquid assets to cover net cash outflows over a 30-day stress scenarioCorrect
  2. BThe bank's available stable funding exceeds its required stable funding over a one-year horizon
  3. CThe bank's Tier 1 capital is at least a minimum percentage of total leverage exposure
  4. DThe bank can meet all contractual obligations falling due within the next 90 days without selling assets

Explanation

The LCR is a short-term resilience metric: stock of unencumbered HQLA divided by total net cash outflows over a 30-calendar-day stress period, with a minimum of 100%. The one-year stable funding comparison describes the NSFR, not the LCR.

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