Question

Liquidity Coverage Ratio (LCR) requires Australian ADIs to hold sufficient liquid assets to meet what period of net cash outflows, as projected under an APRA-prescribed stress scenario:

Option 1: 7 days
Option 2: 30 days
Option 3: 90 days
Option 4: 30 days

Answer 1

The Liquidity Coverage Ratio (LCR) ensures that Australian ADIs hold enough liquid assets to cover 30 days of net cash outflows in a stress scenario. This regulatory measure is designed to mitigate risks associated with asset-liability mismatches and to ensure financial stability by safeguarding against sudden withdrawal demands.

Step-by-step explanation:

The Liquidity Coverage Ratio (LCR) requires Australian Authorized Deposit-taking Institutions (ADIs) to hold adequate high-quality liquid assets that can be easily converted into cash to meet their net cash outflows over a 30-day period under an APRA-prescribed stress scenario. This is to ensure that banks have enough liquidity to handle an asset-liability time mismatch, where customers can demand their deposits back in the short term, even though banks may have loaned out these funds on a much longer-term basis.

Understanding LCR is important because it relates to an institution's balance sheet stability, particularly the ability to address liabilities such as customer deposits. The ratio serves as a regulatory measure to assess and mitigate the risks associated with bank capital and liquidity. It seeks to prevent situations where banks could struggle to cover short-term withdrawals by their customers, thereby ensuring overall financial stability.