FRM Part II · FRM Exam Part II · Liquidity Risk
Under the LCR, a bank computes net cash outflows over 30 days. Total expected cash outflows are USD 500 million and total expected cash inflows are USD 450 million. Which result applies under the Basel III inflow cap?
Basel III limits recognised inflows to 75% of total outflows, so inflows count as USD 375 million rather than 450 million. Net outflows are therefore 500 minus 375, or USD 125 million, which prevents banks relying wholly on inflows.
- ANet outflows are USD 125 million because inflows are capped at 75% of outflowsCorrect
- BNet outflows are USD 50 million because inflows are fully recognised
- CNet outflows are USD 225 million because inflows are capped at 55% of outflows
- DNet outflows are USD 375 million because inflows are capped at 25% of outflows
Explanation
Inflows are capped at 75% of total outflows: 0.75 × 500 = 375. Net outflows = 500 − 375 = 125. Recognising all inflows (50) ignores the cap.
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