Module: | MODULE B: RISK MANAGEMENT
Q448: Scenario: An Indian parent bank faces a severe domestic liquidity crunch. It has a highly profitable subsidiary in a foreign jurisdiction that currently holds 500 million dollars in excess High Quality Liquid Assets. However, that foreign jurisdiction enforces extremely strict capital controls. Based on consolidated liquidity risk management principles, consider the following statements:
1. The parent bank can immediately and unconditionally transfer the 500 million dollars from the foreign subsidiary to India to fulfill its domestic Liquidity Coverage Ratio shortfall.
2. Excess liquid assets held in a foreign jurisdiction with strict capital controls are classified as a Trapped Pool due to the lack of cross-border fungibility.
3. The parent bank is regulatorily forbidden from counting this Trapped Pool towards its consolidated unencumbered High Quality Liquid Assets required for domestic compliance.
Which of the statements given above is/are correct?
2. Excess liquid assets held in a foreign jurisdiction with strict capital controls are classified as a Trapped Pool due to the lack of cross-border fungibility.
3. The parent bank is regulatorily forbidden from counting this Trapped Pool towards its consolidated unencumbered High Quality Liquid Assets required for domestic compliance.
Which of the statements given above is/are correct?
✅ Correct Answer: B
The correct answer is B. Statement 1 is incorrect: Capital controls create massive regulatory friction.
The Indian parent bank cannot unconditionally or immediately repatriate the 500 million dollars.
The host country's strict capital controls block the free flow of funds, meaning cross-border liquidity fungibility is severely compromised during a crisis.
Statement 2 is correct: In liquidity risk terminology, when excess liquid assets are locked within a specific jurisdiction due to stringent capital controls, ring-fencing laws, or non-convertibility restrictions, they are officially classified as a "Trapped Pool." Their lack of cross-border fungibility makes them useless for global crisis management.
Statement 3 is correct: Under Basel III and RBI consolidated LCR guidelines, a parent bank is strictly forbidden from counting a Trapped Pool towards its consolidated unencumbered High Quality Liquid Assets (HQLA) intended to cover domestic shortfalls.
If the asset cannot be seamlessly transferred to the parent in a time of stress, it fails the definition of being readily available liquidity.
The Indian parent bank cannot unconditionally or immediately repatriate the 500 million dollars.
The host country's strict capital controls block the free flow of funds, meaning cross-border liquidity fungibility is severely compromised during a crisis.
Statement 2 is correct: In liquidity risk terminology, when excess liquid assets are locked within a specific jurisdiction due to stringent capital controls, ring-fencing laws, or non-convertibility restrictions, they are officially classified as a "Trapped Pool." Their lack of cross-border fungibility makes them useless for global crisis management.
Statement 3 is correct: Under Basel III and RBI consolidated LCR guidelines, a parent bank is strictly forbidden from counting a Trapped Pool towards its consolidated unencumbered High Quality Liquid Assets (HQLA) intended to cover domestic shortfalls.
If the asset cannot be seamlessly transferred to the parent in a time of stress, it fails the definition of being readily available liquidity.