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Module: | Objective, Scope & Regulatory Baseline

Q1: What is the primary objective and mathematical definition of the Liquidity Coverage Ratio (LCR)?

A
To ensure long-term solvency by maintaining capital equal to 9% of Risk-Weighted Assets.
B
To promote short-term resilience by ensuring a bank has sufficient High-Quality Liquid Assets (HQLA) to survive a significant stress scenario lasting 30 calendar days (Ratio = Stock of HQLA / Total Net Cash Outflows over next 30 days).
C
To ensure a bank can survive a 90-day stress scenario by maintaining a ratio of Net Inflows to Outflows of at least 100%.
D
To limit the concentration of funding from any single counterparty to 10% of total liabilities.
✅ Correct Answer: B
In the context of Liquidity Coverage Ratio (LCR), this question examines the fundamental definition mandated by the Basel Committee.
The core objective is promoting short-term resilience against liquidity shocks over a 30-day horizon.
It requires banks to hold adequate High Quality Liquid Assets (HQLA) to cover total net cash outflows.
While the minimum requirement is 100 percent, banks may use the stock during stress periods.
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