Liquidity Coverage Ratio (LCR) is a high-weightage topic for aspirants preparing for RBI Grade B Exam, SBI PO, IBPS PO, and Bank Promotion Exams.
This MCQ set is designed strictly as per exam trends and high-probability areas.
Why This Liquidity Coverage Ratio (LCR) MCQ Set Matters?
Exam Relevance:
In RBI Grade B Exam, SBI PO, IBPS PO, and Bank Promotion Exams, examiner frequently tests candidates on Basel III norms and risk management metrics. LCR is central to the liquidity framework, making these questions critical for scoring in professional knowledge sections.
Difficulty: Moderate to Hard (Concept-Based)
Recommended: RBI update on LCR
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Liquidity Coverage Ratio (LCR) – 12 Most Expected Questions
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What is the primary objective and mathematical definition of the Liquidity Coverage Ratio (LCR)?
Explanation
Correct: B
In the context of Liquidity Coverage Ratio (LCR), this question examines the fundamental definition mandated by the Basel Committee. The core objective is promoting short-term resilience against liquidity shocks over a 30-day horizon. It requires banks to hold adequate High Quality Liquid Assets (HQLA) to cover total net cash outflows. While the minimum requirement is 100 percent, banks may use the stock during stress periods.
In the context of Liquidity Coverage Ratio (LCR), this question examines the fundamental definition mandated by the Basel Committee. The core objective is promoting short-term resilience against liquidity shocks over a 30-day horizon. It requires banks to hold adequate High Quality Liquid Assets (HQLA) to cover total net cash outflows. While the minimum requirement is 100 percent, banks may use the stock during stress periods.
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Which of the following statements regarding the scope, application, and stress scenario of the LCR are correct?
1. Foreign banks operating as branches in India must comply with the LCR on a standalone basis for their Indian operations only.
2. The stress scenario includes a run-off of retail deposits and a partial loss of unsecured wholesale funding, but excludes any assumption of a credit rating downgrade.
3. During a period of financial stress, a bank may allow its LCR to fall below 100 per cent, provided it immediately reports the shortfall and reasons to the RBI.
4. The stress scenario assumes a total inability to renew secured funding with the central bank.
1. Foreign banks operating as branches in India must comply with the LCR on a standalone basis for their Indian operations only.
2. The stress scenario includes a run-off of retail deposits and a partial loss of unsecured wholesale funding, but excludes any assumption of a credit rating downgrade.
3. During a period of financial stress, a bank may allow its LCR to fall below 100 per cent, provided it immediately reports the shortfall and reasons to the RBI.
4. The stress scenario assumes a total inability to renew secured funding with the central bank.
Explanation
Correct: A
From the Liquidity Coverage Ratio (LCR) syllabus perspective, this concept highlights the regulatory scope and stress assumptions. Foreign bank branches must comply on a standalone basis. Crucially, the stress scenario does include a credit rating downgrade of up to three notches. This aligns with the RBI Liquidity Framework which permits using HQLA below 100 percent during stress if reported immediately.
From the Liquidity Coverage Ratio (LCR) syllabus perspective, this concept highlights the regulatory scope and stress assumptions. Foreign bank branches must comply on a standalone basis. Crucially, the stress scenario does include a credit rating downgrade of up to three notches. This aligns with the RBI Liquidity Framework which permits using HQLA below 100 percent during stress if reported immediately.
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Which of the following correctly describes the “Consolidated LCR” treatment for cross-border banking groups?
1. Surplus HQLA: Surplus HQLA held in a subsidiary can only be included in the consolidated stock if it is freely transferable to the parent entity.
2. Retail Deposits: For retail and small business deposits, the group must generally follow the liquidity parameters of the *host* jurisdiction where the entity operates.
3. Transfer Restrictions: The calculation must ignore local currency convertibility restrictions to ensuring a standardized global metric.
1. Surplus HQLA: Surplus HQLA held in a subsidiary can only be included in the consolidated stock if it is freely transferable to the parent entity.
2. Retail Deposits: For retail and small business deposits, the group must generally follow the liquidity parameters of the *host* jurisdiction where the entity operates.
3. Transfer Restrictions: The calculation must ignore local currency convertibility restrictions to ensuring a standardized global metric.
Explanation
Correct: B
This concept within Liquidity Coverage Ratio (LCR) is important because it governs how global banks manage liquidity across borders. Consolidated calculations must respect transfer restrictions; thus, surplus HQLA is only counted if freely transferable. Additionally, Net Cash Outflows for retail deposits follow host jurisdiction rules to reflect local behavior, contrary to the idea of ignoring local restrictions.
This concept within Liquidity Coverage Ratio (LCR) is important because it governs how global banks manage liquidity across borders. Consolidated calculations must respect transfer restrictions; thus, surplus HQLA is only counted if freely transferable. Additionally, Net Cash Outflows for retail deposits follow host jurisdiction rules to reflect local behavior, contrary to the idea of ignoring local restrictions.
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Which of the following assets qualify as Level 1 High Quality Liquid Assets (HQLA) without any haircut or limit?
1. Cash (including excess CRR).
2. Government securities in excess of the minimum SLR requirement.
3. Overnight balances held with RBI under the Standing Deposit Facility (SDF).
4. Corporate Bonds rated AA- or above.
1. Cash (including excess CRR).
2. Government securities in excess of the minimum SLR requirement.
3. Overnight balances held with RBI under the Standing Deposit Facility (SDF).
4. Corporate Bonds rated AA- or above.
Explanation
Correct: B
Exam questions from Liquidity Coverage Ratio (LCR) often focus on the classification of liquid assets. Level 1 assets, which include cash, excess government securities, and SDF balances, face no haircuts or caps. Corporate bonds rated AA- or above are classified as Level 2A assets under Basel III Liquidity Standards, attracting a 15 percent haircut and a 40 percent cap.
Exam questions from Liquidity Coverage Ratio (LCR) often focus on the classification of liquid assets. Level 1 assets, which include cash, excess government securities, and SDF balances, face no haircuts or caps. Corporate bonds rated AA- or above are classified as Level 2A assets under Basel III Liquidity Standards, attracting a 15 percent haircut and a 40 percent cap.
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Regarding the caps and haircuts for Level 2 HQLA, which of the following combinations is correct?
Explanation
Correct: A
A key idea tested in Liquidity Coverage Ratio (LCR) relates to the strict valuation adjustments applied to less liquid assets. Level 2 assets are collectively capped at 40 percent of the total HQLA stock. Specifically, Level 2A assets face a 15 percent haircut, while Level 2B assets face a 50 percent haircut, ensuring the stock retains high value during stress.
A key idea tested in Liquidity Coverage Ratio (LCR) relates to the strict valuation adjustments applied to less liquid assets. Level 2 assets are collectively capped at 40 percent of the total HQLA stock. Specifically, Level 2A assets face a 15 percent haircut, while Level 2B assets face a 50 percent haircut, ensuring the stock retains high value during stress.
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To ensure operational readiness, banks must adhere to specific “Operational Requirements” for their HQLA stock. Which of the following is NOT a valid requirement?
Explanation
Correct: D
Understanding this aspect of Liquidity Coverage Ratio (LCR) helps aspirants grasp the practical enforceability of liquidity buffers. Assets cannot be counted if the bank lacks the operational capability to monetize them during stress. The RBI Liquidity Framework mandates that assets must be unencumbered, under the control of the Treasurer, and periodically tested for monetization.
Understanding this aspect of Liquidity Coverage Ratio (LCR) helps aspirants grasp the practical enforceability of liquidity buffers. Assets cannot be counted if the bank lacks the operational capability to monetize them during stress. The RBI Liquidity Framework mandates that assets must be unencumbered, under the control of the Treasurer, and periodically tested for monetization.
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How are “Cash Outflows” calculated for the following specific deposit categories?
1. Stable Retail Deposits: Insured transactional/relationship accounts.
2. Internet & Mobile Banking (IMB) Deposits: Additional run-off factor applicable from April
2026.3. Small Business Customers (SBC): Treated as retail if aggregated funding is up to ₹7.5 crore.
4. Operational Deposits: Excess balances not required for operations.
1. Stable Retail Deposits: Insured transactional/relationship accounts.
2. Internet & Mobile Banking (IMB) Deposits: Additional run-off factor applicable from April
2026.3. Small Business Customers (SBC): Treated as retail if aggregated funding is up to ₹7.5 crore.
4. Operational Deposits: Excess balances not required for operations.
Explanation
Correct: A
In the context of Liquidity Coverage Ratio (LCR), this question examines the nuances of run-off rates. Stable insured deposits generally have a 5 percent run-off. Recent updates introduce an extra 2.5 percent run-off for IMB-enabled accounts from 2026. SBC deposits are treated as retail up to 7.5 crore rupees. Excess operational balances are treated as non-operational, increasing Net Cash Outflows.
In the context of Liquidity Coverage Ratio (LCR), this question examines the nuances of run-off rates. Stable insured deposits generally have a 5 percent run-off. Recent updates introduce an extra 2.5 percent run-off for IMB-enabled accounts from 2026. SBC deposits are treated as retail up to 7.5 crore rupees. Excess operational balances are treated as non-operational, increasing Net Cash Outflows.
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A bank pledges a deposit to secure a loan. Under what conditions can this pledged deposit be EXCLUDED from LCR outflows?
Explanation
Correct: B
From the Liquidity Coverage Ratio (LCR) syllabus perspective, this concept highlights the treatment of encumbered deposits. A pledged deposit is excluded from outflows only if the associated loan does not settle within the 30-day window and the pledge is legally binding. This prevents the double counting of liquidity risks within the Basel III Liquidity Standards framework.
From the Liquidity Coverage Ratio (LCR) syllabus perspective, this concept highlights the treatment of encumbered deposits. A pledged deposit is excluded from outflows only if the associated loan does not settle within the 30-day window and the pledge is legally binding. This prevents the double counting of liquidity risks within the Basel III Liquidity Standards framework.
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Regarding “Cash Inflows” and “Reverse Repos,” which of the following scenarios is correct?
1. Reverse Repo (Level 1 Asset): Assumed to be rolled over (0% Inflow).
2. Reverse Repo (Non-HQLA): Assumed NOT to be rolled over (100% Inflow).
3. Total Inflow Cap: Inflows are capped at 75% of Total Outflows.
4. Open Maturity Loans: Included as inflow even if no payment is due.
1. Reverse Repo (Level 1 Asset): Assumed to be rolled over (0% Inflow).
2. Reverse Repo (Non-HQLA): Assumed NOT to be rolled over (100% Inflow).
3. Total Inflow Cap: Inflows are capped at 75% of Total Outflows.
4. Open Maturity Loans: Included as inflow even if no payment is due.
Explanation
Correct: A
This concept within Liquidity Coverage Ratio (LCR) is important because it prevents banks from over-relying on inflows. Reverse repos backed by Level 1 assets are assumed to roll over (0 percent inflow), while those with non-HQLA provide 100 percent inflow. The 75 percent cap on total inflows ensures banks hold a minimum stock of High Quality Liquid Assets.
This concept within Liquidity Coverage Ratio (LCR) is important because it prevents banks from over-relying on inflows. Reverse repos backed by Level 1 assets are assumed to roll over (0 percent inflow), while those with non-HQLA provide 100 percent inflow. The 75 percent cap on total inflows ensures banks hold a minimum stock of High Quality Liquid Assets.
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Which of the following correctly matches the LCR “Monitoring Tool” with its function?
1. Contractual Maturity Mismatch: Identifies gaps in time buckets to assess maturity transformation.
2. Concentration of Funding: Monitors funding from significant counterparties, instruments, and currencies.
3. BLR-3 (Available Unencumbered Assets): Captures assets eligible for collateral in secondary markets/central banks.
4. BLR-4 (LCR by Significant Currency): Required for all banks, including foreign bank branches.
1. Contractual Maturity Mismatch: Identifies gaps in time buckets to assess maturity transformation.
2. Concentration of Funding: Monitors funding from significant counterparties, instruments, and currencies.
3. BLR-3 (Available Unencumbered Assets): Captures assets eligible for collateral in secondary markets/central banks.
4. BLR-4 (LCR by Significant Currency): Required for all banks, including foreign bank branches.
Explanation
Correct: B
Exam questions from Liquidity Coverage Ratio (LCR) often focus on reporting standards like BLR. Contractual mismatch, funding concentration, and available unencumbered assets are standard monitoring tools. However, foreign bank branches are exempt from BLR-4 as they do not typically hold foreign currency HQLA, a specific detail in the RBI Liquidity Framework.
Exam questions from Liquidity Coverage Ratio (LCR) often focus on reporting standards like BLR. Contractual mismatch, funding concentration, and available unencumbered assets are standard monitoring tools. However, foreign bank branches are exempt from BLR-4 as they do not typically hold foreign currency HQLA, a specific detail in the RBI Liquidity Framework.
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In the LCR stress scenario, how are “Downgrade Triggers” and “Collateral Substitution” treated?
Explanation
Correct: B
A key idea tested in Liquidity Coverage Ratio (LCR) relates to contingent liabilities. The stress scenario mandates assuming a 3-notch credit rating downgrade, triggering 100 percent outflow of required additional collateral. Similarly, if collateral substitution to non-HQLA assets is possible without bank consent, it contributes significantly to Net Cash Outflows.
A key idea tested in Liquidity Coverage Ratio (LCR) relates to contingent liabilities. The stress scenario mandates assuming a 3-notch credit rating downgrade, triggering 100 percent outflow of required additional collateral. Similarly, if collateral substitution to non-HQLA assets is possible without bank consent, it contributes significantly to Net Cash Outflows.
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Regarding “Derivative Cash Outflows,” how must a bank calculate the increased liquidity need related to market valuation changes?
Explanation
Correct: B
Understanding this aspect of Liquidity Coverage Ratio (LCR) helps aspirants calculate complex derivative exposures. The “Look-back approach” is mandatory here. Banks must identify the largest absolute net 30-day collateral flow from the preceding 24 months to estimate outflows from valuation changes, ensuring alignment with Basel III Liquidity Standards.
Understanding this aspect of Liquidity Coverage Ratio (LCR) helps aspirants calculate complex derivative exposures. The “Look-back approach” is mandatory here. Banks must identify the largest absolute net 30-day collateral flow from the preceding 24 months to estimate outflows from valuation changes, ensuring alignment with Basel III Liquidity Standards.
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⚡ Quick Revision: Key Facts for Liquidity Coverage Ratio (LCR)
LCR was introduced as part of the Basel III reforms to improve banking sector resilience.
The minimum LCR requirement for banks in India is 100 percent on an ongoing basis.
LCR = Stock of High Quality Liquid Assets (HQLA) / Total Net Cash Outflows over the next 30 calendar days.
Level 1 HQLA can be included in the stock without any haircut or limit.
Cash, including cash reserves in excess of required CRR, qualifies as Level 1 HQLA.
Government securities in excess of the minimum SLR requirement are Level 1 HQLA.
Marketable securities issued by foreign sovereigns with a 0 percent risk weight are Level 1 HQLA.
Level 2 assets are divided into Level 2A and Level 2B assets.
Level 2A assets attract a 15 percent haircut.
Level 2B assets attract a 50 percent haircut.
Total Level 2 assets cannot exceed 40 percent of the total stock of HQLA.
Level 2B assets cannot exceed 15 percent of the total stock of HQLA.
Stable retail deposits generally attract a 5 percent run-off rate.
Less stable retail deposits attract a run-off rate of 10 percent or higher.
Unsecured wholesale funding provided by small business customers is treated similarly to retail deposits.
Operational deposits generated by clearing, custody, and cash management activities have a 25 percent run-off rate.
The LCR stress scenario assumes a 3-notch downgrade in the bank’s credit rating.
Total cash inflows are capped at 75 percent of total cash outflows.
Banks must report LCR valuations to the RBI, typically on a daily or monthly average basis depending on size.
Foreign bank branches in India must calculate LCR on a standalone basis.
Assets must be unencumbered to qualify as HQLA.
❓ Frequently Asked Questions
What is the main purpose of the Liquidity Coverage Ratio (LCR)?
The LCR aims to ensure that banks have enough high-quality liquid assets to survive a significant liquidity stress scenario lasting 30 days.
What is the minimum LCR requirement for Indian banks?
As of January 1, 2019, the minimum LCR requirement for banks is 100 percent.
Can banks use their HQLA stock if LCR falls below 100%?
Yes, banks are allowed to use their stock of HQLA during periods of stress, even if the LCR falls below 100 percent, provided they report it to the RBI immediately.
What assets are considered Level 1 HQLA?
Level 1 HQLA includes cash, excess CRR, government securities above SLR, and marketable securities issued by sovereigns with 0% risk weight.
What is the haircut applied to Level 2A assets?
Level 2A assets are subject to a 15 percent haircut on their current market value.
How are stable retail deposits treated in LCR calculations?
Stable retail deposits, which are fully insured and transactional, are assigned a 5 percent run-off rate.
What is the cap on total cash inflows in the LCR calculation?
Total cash inflows are capped at 75 percent of total cash outflows to ensure banks hold a minimum amount of HQLA.
Are foreign bank branches in India exempt from LCR?
No, foreign bank branches operating in India must comply with the LCR framework on a standalone basis for their Indian operations.
What is the run-off rate for operational deposits?
Operational deposits required for clearing, custody, and cash management services attract a 25 percent run-off rate.
What is the stress period duration assumed in LCR?
The LCR framework assumes a stress scenario lasting for 30 calendar days.
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