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FRM Part II · FRM Exam Part II · Liquidity Risk

A bank's treasury team is reviewing the purpose of 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-day stress scenario. The one-year available versus required stable funding comparison is the NSFR, not the LCR.

  1. AStock of unencumbered high-quality liquid assets at least equal to total net cash outflows over a 30-day stress periodCorrect
  2. BAvailable stable funding at least equal to required stable funding over a one-year horizon
  3. CTier 1 capital of at least 3% of total exposure, including off-balance-sheet items
  4. DLoans not to exceed a fixed percentage of total customer deposits at each quarter-end

Explanation

The LCR is a short-term standard: the stock of unencumbered HQLA must be at least 100% of total net cash outflows over a 30-calendar-day stress scenario. The one-year stable funding comparison describes the NSFR, and the 3% capital test describes the leverage ratio.

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