Economics • Banking & FinanceHard
What is the structural purpose of the 'Liquidity Coverage Ratio' introduced under the Basel III international regulatory framework?
A. To ensure banks maintain an adequate reserve of unencumbered high quality liquid assets to withstand a 30 day acute stress scenario✓ Correct Answer
B. To limit long term foreign currency borrowing by domestic corporate entities
C. To restrict speculative trading in financial derivatives and commodity futures markets
D. To mandate complete credit write offs for legacy non performing assets within two financial years
💡 Solution & Explanation
The Liquidity Coverage Ratio requires financial institutions to hold sufficient high quality liquid assets that can be easily converted into cash to meet liquidity needs over a 30 calendar day severe stress test. Net stable funding ratio complements this by addressing longer term funding profiles. High quality liquid assets typically comprise cash, central bank reserves, and qualifying government securities. This metric prevents bank runs by ensuring institutions survive sudden wholesale funding withdrawals.
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