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FRM Part II · FRM Exam Part II · Solvency, Liquidity and Other Regulation After the Global Financial Crisis

Which statement correctly distinguishes the LCR from the NSFR under Basel III?

The NSFR targets structural, longer-term funding stability by comparing available and required stable funding over one year, while the LCR tests short-term resilience by comparing HQLA with net stressed outflows over 30 days. The two are complementary, with different numerators and horizons.

  1. AThe NSFR addresses structural funding mismatches over a one-year horizon, while the LCR addresses short-term resilience over 30 daysCorrect
  2. BThe NSFR is a 30-day stress measure, while the LCR covers a one-year horizon
  3. CBoth ratios rely on HQLA as the numerator
  4. DThe LCR compares capital to risk-weighted assets, while the NSFR compares capital to leverage exposure

Explanation

The NSFR compares available stable funding with required stable funding over a one-year horizon to limit reliance on short-term wholesale funding. The LCR uses HQLA over 30 days of stress. Only the LCR has HQLA as numerator, and neither is a capital ratio.

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