Module: | MODULE B: RISK MANAGEMENT
Q434: Consider the following statements regarding the principles of maintaining High Quality Liquid Assets (HQLA) under Basel III and RBI guidelines:
1. High Quality Liquid Assets must remain strictly unencumbered, meaning they cannot be pledged to secure any other financial loan or operational obligation.
2. Banks are required to maintain a sufficient stock of unencumbered High Quality Liquid Assets to completely offset the net cash outflows during a severe 30-day stress scenario.
3. The Reserve Bank of India strictly prohibits the inclusion of standard government securities in the High Quality Liquid Assets pool to prevent sovereign risk concentration.
Which of the statements given above is/are correct?
2. Banks are required to maintain a sufficient stock of unencumbered High Quality Liquid Assets to completely offset the net cash outflows during a severe 30-day stress scenario.
3. The Reserve Bank of India strictly prohibits the inclusion of standard government securities in the High Quality Liquid Assets pool to prevent sovereign risk concentration.
Which of the statements given above is/are correct?
✅ Correct Answer: A
The correct answer is A. Statement 1 is correct: A fundamental principle of the Liquidity Coverage Ratio (LCR) framework is that High Quality Liquid Assets (HQLA) must be "unencumbered." This means there must be no legal, regulatory, or operational impediments to utilizing these assets; they cannot be pledged as collateral for any other borrowing or clearing-house obligation.
Statement 2 is correct: The explicit purpose of the HQLA pool is to ensure that a bank has enough immediately available liquidity to survive a severe, combined stress scenario for exactly 30 calendar days, offsetting its total net cash outflows.
Statement 3 is incorrect: RBI guidelines do not prohibit government securities from the HQLA pool.
In fact, standard Government of India dated securities (G-Secs) and Treasury Bills constitute the core of "Level 1" HQLA.
They attract a 0% haircut, making them the most critical and highly recognized liquid assets in the Indian banking system.
Statement 2 is correct: The explicit purpose of the HQLA pool is to ensure that a bank has enough immediately available liquidity to survive a severe, combined stress scenario for exactly 30 calendar days, offsetting its total net cash outflows.
Statement 3 is incorrect: RBI guidelines do not prohibit government securities from the HQLA pool.
In fact, standard Government of India dated securities (G-Secs) and Treasury Bills constitute the core of "Level 1" HQLA.
They attract a 0% haircut, making them the most critical and highly recognized liquid assets in the Indian banking system.