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FRM Part II · FRM Exam Part II · Liquidity Risk

A treasurer notes that the bank's LCR is 120% but its NSFR is 92%. Which interpretation and response is most appropriate?

The LCR covers 30-day stress liquidity while the NSFR covers one-year structural funding, so a strong LCR cannot offset an NSFR of 92%. The bank breaches the NSFR minimum and should raise longer-term or more stable funding, or reduce assets with high required stable funding.

  1. AShort-term liquidity is adequate but structural funding is insufficient, so the bank should lengthen funding maturities or raise stable fundingCorrect
  2. BThe bank is compliant because the LCR exceeds 100%, so no action is needed
  3. CThe bank should buy more Level 1 assets to lift the NSFR above 100%
  4. DThe bank should shorten its liabilities to improve both ratios

Explanation

An NSFR below 100% breaches the minimum: available stable funding is less than required stable funding over a one-year horizon. A strong LCR does not offset this. Remedies include issuing longer-term debt or attracting stable deposits, or reducing assets needing high RSF.

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