What is the difference between the LCR and the NSFR, and what does each one protect against?
A core Risk & Compliance interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.
THE SHORT ANSWER
Both are Basel III liquidity ratios but over different horizons. The Liquidity Coverage Ratio (LCR) is short-term: high-quality liquid assets divided by net cash outflows over a 30-day stress, required ≥100% — it ensures a bank survives a one-month acute liquidity shock. The Net Stable Funding Ratio (NSFR) is structural/long-term: available stable funding divided by required stable funding over a one-year horizon, also ≥100% — it ensures assets are funded with sufficiently stable liabilities, discouraging excessive reliance on short-term wholesale funding. In short, LCR is about surviving a 30-day run; NSFR is about not building a fragile maturity-transformation profile in the first place.
WHAT INTERVIEWERS LISTEN FOR
- ✓LCR: 30-day stress, HQLA / net outflows ≥100%
- ✓NSFR: 1-year, available / required stable funding ≥100%
- ✓LCR = acute shock survival; NSFR = structural funding stability
- ✓Both Basel III, both ≥100%
COMMON MISTAKES
- ✗Mixing up the two horizons
- ✗Not knowing both target ≥100%
- ✗Confusing liquidity with capital ratios
Reading isn't the same as answering under pressure.
Interviewers don't hand you the model answer — you deliver yours on a clock. Practice this and 1,000+ questions with AI feedback on every answer.
RELATED QUESTIONS
- Explain the COSO ERM framework.
- Explain risk appetite versus risk tolerance.
- What is the primary purpose of the ICAAP under Basel?
- Explain the three lines of defense model and its role in risk management.
- What is the purpose of the ICAAP under Basel?
- What is the difference between a risk appetite statement and a risk limit?