What is the purpose of the Liquidity Coverage Ratio?
A) to mitigate market replacement risk across markets
B) to eliminate funding mismatches by establishing a minimum acceptable amount of stable funding
C) to ensure that banks have enough high-quality liquid assets to survive a 30-day period of acute market stress
D) to minimize duration risk on a bank's assets over a one-year horizon

Question

Quizplus · Accepted Answer

The Liquidity Coverage Ratio (LCR) is designed to ensure that banks have enough high-quality liquid assets to survive a 30-day period of acute market stress. It is meant to address the risk of a run on the bank, where depositors or other creditors withdraw their funds quickly and en masse, leaving the bank without enough liquidity to meet its obligations. The LCR requires banks to hold a minimum amount of highly liquid assets, such as cash and government bonds, relative to their expected cash outflows over the next 30 days. This helps to ensure that banks can meet their obligations even if they experience a sudden and severe liquidity shock.

What Is the Purpose of the Liquidity Coverage Ratio