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FRM Part II · FRM Exam Part II · Monitoring Liquidity

During a period of stress, a bank's LCR falls below 100%. According to the Basel III framework, how should this be interpreted?

Basel III intends the HQLA buffer to be drawn on in stress, so an LCR temporarily below 100% is acceptable. The bank should engage its supervisor, who assesses the circumstances and appropriate action, rather than the bank hoarding HQLA or facing automatic closure.

  1. AThe bank must immediately be closed by its supervisor
  2. BThe bank may use its HQLA stock to meet outflows, even if the ratio temporarily falls below 100%, and should discuss with its supervisorCorrect
  3. CThe bank must stop using HQLA to preserve the ratio
  4. DThe bank must raise its minimum ratio to 120%

Explanation

The HQLA stock is intended to be used in stress, so the ratio may fall below 100% while the bank deals with outflows. The supervisor assesses the situation and the remedial actions; it does not require automatic closure or hoarding of HQLA.

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