Module: | MODULE B: RISK MANAGEMENT
Q461: Consider the following statements regarding the classification of Level 1 High-Quality Liquid Assets (HQLA) under the LCR framework:
1. Level 1 assets include cash in hand and excess Cash Reserve Ratio balances maintained with the Reserve Bank of India.
2. Marketable securities representing Level 1 assets are subject to a mandatory 15 percent haircut before being included in the total HQLA stock.
3. Level 1 assets can constitute up to 100 percent of the total stock of HQLA without any regulatory caps.
Which of the statements given above is/are correct?
2. Marketable securities representing Level 1 assets are subject to a mandatory 15 percent haircut before being included in the total HQLA stock.
3. Level 1 assets can constitute up to 100 percent of the total stock of HQLA without any regulatory caps.
Which of the statements given above is/are correct?
✅ Correct Answer: B
The correct answer is B. Statement 1 is correct: Level 1 HQLA comprises the highest quality assets, which include physical cash, excess CRR balances with the RBI, and government securities eligible for SLR.
Statement 2 is incorrect: Level 1 assets are considered virtually risk-free and highly liquid, hence they are included in the HQLA stock at market value with a 0 percent haircut.
The 15 percent haircut applies to Level 2A assets.
Statement 3 is correct: Because of their supreme liquidity and safety profile, Level 1 assets can make up to 100 percent of the total HQLA stock, completely free from any composition caps, unlike Level 2 assets which are capped at 40 percent.
Statement 2 is incorrect: Level 1 assets are considered virtually risk-free and highly liquid, hence they are included in the HQLA stock at market value with a 0 percent haircut.
The 15 percent haircut applies to Level 2A assets.
Statement 3 is correct: Because of their supreme liquidity and safety profile, Level 1 assets can make up to 100 percent of the total HQLA stock, completely free from any composition caps, unlike Level 2 assets which are capped at 40 percent.