Economics • Banking & FinanceMedium
What is the primary purpose of the 'Liquidity Coverage Ratio (LCR)' under Basel III guidelines?
A. To ensure that banks hold a sufficient reserve of high-quality liquid assets to survive a 30-day acute stress scenario✓ Correct Answer
B. To limit the maximum leverage ratio of commercial banks relative to their Tier-2 capital
C. To mandate long-term funding structures for infrastructure financing projects
D. To prevent banks from extending unsecured credit to real estate speculators
💡 Solution & Explanation
The Liquidity Coverage Ratio under Basel III mandates that banks maintain a sufficient stock of unencumbered high-quality liquid assets to survive a severe 30-day stress scenario characterized by significant deposit withdrawals. Unlike leverage limits or long-term funding metrics, the LCR specifically addresses short-term cash flow resilience. This requirement was introduced internationally in response to the vulnerability exposed by the global financial crisis.
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