Which statement about Basel III liquidity metrics is true?

Which statement about Basel III liquidity metrics is true?

• A. LCR and NSFR are optional for most banks
• B. LCR measures stable funding while NSFR measures short-term liquidity
• C. LCR requires high-quality liquid assets to cover 30 days of net cash outflows; NSFR requires stable funding relative to assets and activities over a one-year horizon
• D. NSFR measures cash on hand

Answer: (C)

Basel III uses two liquidity measures to cover different horizons: a short-term stress test and a longer-term funding stability test. The short-term measure, the LCR, requires banks to hold a buffer of high-quality liquid assets that can cover net cash outflows over a 30-day stressed period. The longer-term measure, the NSFR, requires that available stable funding be sufficient relative to the required stable funding of assets and activities over a one-year horizon. So, the correct statement exactly matches these definitions: LCR for 30 days of net outflows with high-quality liquid assets, and NSFR for stable funding over a one-year horizon. The other statements misstate either the purpose or the scope: LCR and NSFR aren’t optional for most banks; LCR is about short-term liquidity rather than stable funding; NSFR isn’t about cash on hand but about funding stability; and NSFR is not about short-term measures.

Basel III uses two liquidity measures to cover different horizons: a short-term stress test and a longer-term funding stability test. The short-term measure, the LCR, requires banks to hold a buffer of high-quality liquid assets that can cover net cash outflows over a 30-day stressed period. The longer-term measure, the NSFR, requires that available stable funding be sufficient relative to the required stable funding of assets and activities over a one-year horizon. So, the correct statement exactly matches these definitions: LCR for 30 days of net outflows with high-quality liquid assets, and NSFR for stable funding over a one-year horizon.

The other statements misstate either the purpose or the scope: LCR and NSFR aren’t optional for most banks; LCR is about short-term liquidity rather than stable funding; NSFR isn’t about cash on hand but about funding stability; and NSFR is not about short-term measures.