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

A risk manager notes that a bank's LCR is comfortably above 100% but its NSFR is just below 100%. Which interpretation is most appropriate?

The bank can withstand a 30-day stress but has a structural funding weakness. A high LCR means ample HQLA for short-term outflows, while an NSFR below 100% means stable funding is insufficient for its assets and activities over one year, indicating overreliance on short-term funding.

  1. AThe bank is short of high-quality liquid assets for a 30-day stress but funds its long-term assets adequately
  2. BThe bank is well placed for a 30-day stress but relies too heavily on short-term funding relative to the liquidity of its assets over one yearCorrect
  3. CThe bank has breached its leverage ratio requirement
  4. DThe bank has insufficient Tier 1 capital against risk-weighted assets

Explanation

A high LCR shows adequate HQLA against 30-day net outflows. An NSFR under 100% shows available stable funding is below required stable funding, indicating structural maturity mismatch with excessive reliance on less stable funding. The other options confuse the metrics with capital measures.

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