Module: | MODULE B: RISK MANAGEMENT
Q324: Consider the following statements regarding the liquidity standards introduced under Basel III:
1. The Liquidity Coverage Ratio ensures that a bank maintains an adequate stock of unencumbered High-Quality Liquid Assets to survive a 30-day severe stress scenario.
2. The Net Stable Funding Ratio is designed to limit over-reliance on short-term wholesale funding over a longer 1-year time horizon.
3. Only physical gold and central bank reserves qualify as Level 1 High-Quality Liquid Assets under the LCR framework.
Which of the statements given above is/are correct?
2. The Net Stable Funding Ratio is designed to limit over-reliance on short-term wholesale funding over a longer 1-year time horizon.
3. Only physical gold and central bank reserves qualify as Level 1 High-Quality Liquid Assets under the LCR framework.
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 resilience metric.
It strictly requires banks to hold a sufficient reserve of unencumbered High-Quality Liquid Assets (HQLA) that can be immediately converted into cash to meet liquidity needs for a 30-calendar-day 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 their off-balance-sheet activities and assets over a 1-year horizon, mitigating the risk of relying on volatile, short-term wholesale funding.
Statement 3 is incorrect: Under the LCR framework, Level 1 HQLA (which can be included without any haircut limit) includes physical gold and central bank reserves, but crucially, it also explicitly includes high-quality sovereign debt, specifically zero-risk weighted Government Securities (like Indian G-Secs).
It strictly requires banks to hold a sufficient reserve of unencumbered High-Quality Liquid Assets (HQLA) that can be immediately converted into cash to meet liquidity needs for a 30-calendar-day 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 their off-balance-sheet activities and assets over a 1-year horizon, mitigating the risk of relying on volatile, short-term wholesale funding.
Statement 3 is incorrect: Under the LCR framework, Level 1 HQLA (which can be included without any haircut limit) includes physical gold and central bank reserves, but crucially, it also explicitly includes high-quality sovereign debt, specifically zero-risk weighted Government Securities (like Indian G-Secs).