Module: | MODULE B: RISK MANAGEMENT
Q443: Scenario: Omega Bank has successfully survived a severe 30-day liquidity stress event by utilizing its entire High Quality Liquid Assets pool. However, the regulator is deeply concerned about the bank's long-term strategy of relying heavily on 3-month wholesale funding to finance its massive 10-year mortgage loan portfolio. Based on liquidity frameworks, consider the following statements regarding the bank's risk profile:
1. The bank's survival of the 30-day stress event demonstrates full compliance with the primary objective of the Liquidity Coverage Ratio.
2. The regulator's concern regarding the 10-year mortgage portfolio funded by short-term liabilities is specifically addressed by enforcing the Net Stable Funding Ratio.
3. The Net Stable Funding Ratio will heavily penalize this strategy because the 10-year mortgages demand high Required Stable Funding, while the 3-month liabilities provide extremely low Available Stable Funding.
Which of the statements given above is/are correct?
2. The regulator's concern regarding the 10-year mortgage portfolio funded by short-term liabilities is specifically addressed by enforcing the Net Stable Funding Ratio.
3. The Net Stable Funding Ratio will heavily penalize this strategy because the 10-year mortgages demand high Required Stable Funding, while the 3-month liabilities provide extremely low Available Stable Funding.
Which of the statements given above is/are correct?
✅ Correct Answer: D
The correct answer is D. Statement 1 is correct: The sole objective of the Liquidity Coverage Ratio (LCR) is to ensure short-term survival.
By surviving the 30-day acute stress scenario using its HQLA, Omega Bank fulfilled the exact mandate of the LCR framework.
Statement 2 is correct: LCR cannot fix structural balance sheet flaws.
The regulator's concern about structural maturity mismatch (funding long-term assets with short-term volatile liabilities) is precisely the vulnerability that the Net Stable Funding Ratio (NSFR) was designed to address.
Statement 3 is correct: NSFR mechanics will severely penalize Omega Bank.
The 10-year illiquid mortgage assets will attract a very high Required Stable Funding (RSF) factor (demanding stable long-term cash). Simultaneously, the 3-month wholesale deposits are considered highly volatile and will be assigned a near-zero Available Stable Funding (ASF) factor.
The resulting ASF/RSF ratio will plummet below the mandatory 100% threshold, forcing the bank to restructure its funding.
By surviving the 30-day acute stress scenario using its HQLA, Omega Bank fulfilled the exact mandate of the LCR framework.
Statement 2 is correct: LCR cannot fix structural balance sheet flaws.
The regulator's concern about structural maturity mismatch (funding long-term assets with short-term volatile liabilities) is precisely the vulnerability that the Net Stable Funding Ratio (NSFR) was designed to address.
Statement 3 is correct: NSFR mechanics will severely penalize Omega Bank.
The 10-year illiquid mortgage assets will attract a very high Required Stable Funding (RSF) factor (demanding stable long-term cash). Simultaneously, the 3-month wholesale deposits are considered highly volatile and will be assigned a near-zero Available Stable Funding (ASF) factor.
The resulting ASF/RSF ratio will plummet below the mandatory 100% threshold, forcing the bank to restructure its funding.