Module: | MODULE B: RISK MANAGEMENT
Q456: Under the Reserve Bank of India's Liquidity Coverage Ratio framework, consider the following statements regarding the Facility to Avail Liquidity for Liquidity Coverage Ratio (FALLCR):
1. The Facility to Avail Liquidity for Liquidity Coverage Ratio allows banks to reckon a specific portion of their mandatory Statutory Liquidity Ratio portfolio as Level 1 High Quality Liquid Assets.
2. The primary purpose of this facility is to alleviate the systemic shortage of unencumbered, highly liquid government securities during severe stress events.
3. Government securities utilized under this facility attract a severe 50 percent regulatory haircut before being included in the numerator.
Which of the statements given above is/are correct?
2. The primary purpose of this facility is to alleviate the systemic shortage of unencumbered, highly liquid government securities during severe stress events.
3. Government securities utilized under this facility attract a severe 50 percent regulatory haircut before being included in the numerator.
Which of the statements given above is/are correct?
✅ Correct Answer: A
The correct answer is A. Statement 1 is correct: The Facility to Avail Liquidity for Liquidity Coverage Ratio (FALLCR) is a special RBI dispensation.
It allows commercial banks to reckon a prescribed percentage of their mandatory Statutory Liquidity Ratio (SLR) portfolio as eligible High Quality Liquid Assets (HQLA) for computing the LCR.
Statement 2 is correct: Because Indian banks are already required to hold a massive portion of their deposits in government securities (SLR), the availability of excess unencumbered G-Secs in the market is often constrained.
FALLCR is purposefully designed to alleviate this systemic shortage of Level 1 HQLA during liquidity stress.
Statement 3 is incorrect: Assets permitted under FALLCR are standard Indian Government Securities.
Under the Basel III LCR framework adopted by the RBI, all such sovereign G-Secs are classified strictly as Level 1 HQLA and therefore attract a 0 percent haircut, not a 50 percent haircut.
It allows commercial banks to reckon a prescribed percentage of their mandatory Statutory Liquidity Ratio (SLR) portfolio as eligible High Quality Liquid Assets (HQLA) for computing the LCR.
Statement 2 is correct: Because Indian banks are already required to hold a massive portion of their deposits in government securities (SLR), the availability of excess unencumbered G-Secs in the market is often constrained.
FALLCR is purposefully designed to alleviate this systemic shortage of Level 1 HQLA during liquidity stress.
Statement 3 is incorrect: Assets permitted under FALLCR are standard Indian Government Securities.
Under the Basel III LCR framework adopted by the RBI, all such sovereign G-Secs are classified strictly as Level 1 HQLA and therefore attract a 0 percent haircut, not a 50 percent haircut.