Module: | MODULE B: RISK MANAGEMENT
Q297: Consider the following statements regarding the regulatory tools used for managing Liquidity Risk, specifically the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR):
1. The Liquidity Coverage Ratio (LCR) mandates banks to hold a sufficient stock of High-Quality Liquid Assets (HQLA), to survive a 30-day severe stress scenario.
2. The Net Stable Funding Ratio (NSFR) requires banks to maintain a stable funding profile, in relation to their off-balance sheet activities over a one-year horizon.
3. High-Quality Liquid Assets (HQLA) used for computing the LCR, strictly exclude government securities, as they are susceptible to general market risk.
Which of the statements given above is/are correct?
2. The Net Stable Funding Ratio (NSFR) requires banks to maintain a stable funding profile, in relation to their off-balance sheet activities over a one-year horizon.
3. High-Quality Liquid Assets (HQLA) used for computing the LCR, strictly exclude government securities, as they are susceptible to general market risk.
Which of the statements given above is/are correct?
✅ Correct Answer: A
The correct answer is A. Statement 1 is correct: The Liquidity Coverage Ratio (LCR) is a short-term survival metric.
It requires banks to hold enough unencumbered High-Quality Liquid Assets (HQLA) to cover total net cash outflows over a 30-day simulated severe stress scenario.
Statement 2 is correct: The Net Stable Funding Ratio (NSFR) is a longer-term structural metric.
It requires banks to maintain a stable funding profile in relation to the composition of their assets and off-balance sheet activities over a one-year horizon, reducing reliance on short-term wholesale funding.
Statement 3 is incorrect: Government securities (like those held under SLR) are the absolute core of High-Quality Liquid Assets (Level 1 HQLA). They are explicitly included, not excluded, because they can be instantly converted to cash during a crisis, despite carrying some general market risk.
It requires banks to hold enough unencumbered High-Quality Liquid Assets (HQLA) to cover total net cash outflows over a 30-day simulated severe stress scenario.
Statement 2 is correct: The Net Stable Funding Ratio (NSFR) is a longer-term structural metric.
It requires banks to maintain a stable funding profile in relation to the composition of their assets and off-balance sheet activities over a one-year horizon, reducing reliance on short-term wholesale funding.
Statement 3 is incorrect: Government securities (like those held under SLR) are the absolute core of High-Quality Liquid Assets (Level 1 HQLA). They are explicitly included, not excluded, because they can be instantly converted to cash during a crisis, despite carrying some general market risk.