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FRM Part II · FRM Exam Part II · Liquidity Risk

During a stress episode, a bank's LCR falls below 100%. According to the Basel Committee's guidance on the LCR, what is the appropriate understanding of the HQLA stock?

The HQLA stock is meant to be used during stress, so the LCR may temporarily fall below 100 percent. Supervisors should assess the circumstances and respond flexibly, not impose automatic restrictions such as halting lending or deeming the bank insolvent.

  1. AThe HQLA stock is intended to be used in stress, so a temporary fall below 100% is acceptable, and supervisors should assess the situation and respond flexiblyCorrect
  2. BThe bank must immediately cease all lending until the LCR is restored to 100%
  3. CThe bank must convert all Level 2 assets to Level 1 assets within one day
  4. DThe bank is automatically deemed insolvent under the LCR rules

Explanation

Basel states that the HQLA stock is meant to be drawn upon in stress, so the LCR may fall below 100% during such a period. Supervisors assess the situation and respond according to the circumstances, rather than applying automatic penalties or forced asset sales.

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