A large regional bank is assessing its Liquidity Coverage Ratio (LCR) under a 30-day stress scenario. The bank utilizes various repo agreements for funding and liquidity management. Below are details for four distinct repo positions currently on its books:
1. **Repo A:** The bank has pledged $200 million of U.S. Treasury bonds (HQLA Level 1) to a central bank to borrow $198 million cash via an overnight general collateral repo. The haircut applied is 1%.
2. **Repo B:** The bank has pledged $150 million of corporate bonds (non-HQLA, not eligible for Level 2B) to a large international financial institution to borrow $120 million cash. This is a 20-day term repo. The haircut is 20%. The collateral is not rehypothecated.
3. **Repo C:** The bank has lent $100 million of cash to a hedge fund, receiving $105 million of investment-grade corporate bonds (non-HQLA) as collateral. This is an overnight specific collateral repo. The haircut is 5%.
4. **Repo D:** The bank has pledged $300 million of HQLA Level 2A corporate bonds to a non-financial corporate client to borrow $270 million cash. This is a 45-day term repo. The haircut is 10%.
What is the *additional net cash outflow* that Repo B contributes to the bank's LCR calculation for the next 30-day stress horizon, assuming the bank's local regulator strictly follows Basel III LCR guidelines without national discretion for this specific category?
A.$120 million
B.$30 million
C.$60 million
D.$12 million
Rationale:
Under Basel III LCR guidelines, secured funding transactions maturing within the 30-day stress horizon are categorized based on the counterparty and the quality of the collateral pledged. For Repo B, the bank has borrowed $120 million cash from a large international financial institution (a financial counterparty) and has pledged non-HQLA corporate bonds as collateral. According to LCR rules, secured funding from financial institutions against non-HQLA collateral, maturing within 30 days, is subject to a 100% net cash outflow rate. Therefore, the additional net cash outflow for Repo B is 100% of the $120 million borrowed, which is $120 million.
The option of $30 million incorrectly focuses on the haircut amount ($150 million collateral value minus $120 million cash received), which is irrelevant for calculating the LCR outflow rate on the borrowed amount. The LCR outflow applies to the contractual amount of funding received that needs to be repaid or rolled over.
The option of $60 million implies a 50% outflow rate. A 50% outflow rate typically applies to secured funding from financial institutions against Level 2A HQLA, or from non-financial corporates against non-HQLA, which does not match the specific characteristics of Repo B (financial institution counterparty, non-HQLA collateral).
The option of $12 million implies a 10% outflow rate. A 10% outflow rate is generally applicable to secured funding from certain non-financial corporates or public sector entities against HQLA, or stable retail deposits, which again does not correspond to the details of Repo B.
100% Free
Free FRM Questions + Study Tips
Join FRM candidates receiving practice questions and expert exam-day strategies directly to their inbox.
