Module: | MODULE B: RISK MANAGEMENT
Q460: Consider the following statements regarding the core objective and timeline of the Liquidity Coverage Ratio (LCR) under the Basel III framework:
1. The LCR ensures that a bank maintains an adequate stock of unencumbered High-Quality Liquid Assets to survive a significant stress scenario lasting for thirty calendar days.
2. While the LCR promotes short-term resilience, the Net Stable Funding Ratio is designed to address longer-term structural liquidity mismatches over a one-year horizon.
3. The regulatory requirement mandates that the LCR must always be equal to or greater than 100 percent.
Which of the statements given above is/are correct?
2. While the LCR promotes short-term resilience, the Net Stable Funding Ratio is designed to address longer-term structural liquidity mismatches over a one-year horizon.
3. The regulatory requirement mandates that the LCR must always be equal to or greater than 100 percent.
Which of the statements given above is/are correct?
✅ Correct Answer: D
The correct answer is D. Statement 1 is correct: The fundamental objective of the Liquidity Coverage Ratio (LCR) is to promote the short-term resilience of a bank's liquidity risk profile.
It mandates banks to hold a sufficient stock of unencumbered High-Quality Liquid Assets (HQLA) to cover total net cash outflows over a 30-day stress scenario.
Statement 2 is correct: The Basel III liquidity framework has two complementary pillars.
The LCR focuses on 30-day short-term acute stress, whereas the Net Stable Funding Ratio (NSFR) promotes resilience over a longer-term structural horizon of one year.
Statement 3 is correct: The mathematical formula requires that the ratio of the stock of HQLA to total net cash outflows over the next 30 calendar days must be greater than or equal to 100 percent.
It mandates banks to hold a sufficient stock of unencumbered High-Quality Liquid Assets (HQLA) to cover total net cash outflows over a 30-day stress scenario.
Statement 2 is correct: The Basel III liquidity framework has two complementary pillars.
The LCR focuses on 30-day short-term acute stress, whereas the Net Stable Funding Ratio (NSFR) promotes resilience over a longer-term structural horizon of one year.
Statement 3 is correct: The mathematical formula requires that the ratio of the stock of HQLA to total net cash outflows over the next 30 calendar days must be greater than or equal to 100 percent.