Final answer:
The liquidity coverage ratio (LCR) requires Australian ADIs to hold enough liquid assets to cover a 30-day stress period, which corresponds to Option 1. This regulation ensures financial institutions can manage their short-term obligations during periods of liquidity stress.
Step-by-step explanation:
The liquidity coverage ratio (LCR) is a financial regulation designed to ensure that a bank or Authorized Deposit-taking Institution (ADI) has an adequate level of liquid assets to withstand a period of significant liquidity stress. According to the Australian Prudential Regulation Authority (APRA), which governs the LCR requirements in Australia, ADIs are required to hold sufficient liquid assets to meet their cash outflows for a 30-day period under a stress scenario. In this case, the correct answer is Option 1: 30 days. This ensures that the institution can meet its short-term obligations without needing external financial assistance.
For example, given a situation where the ADI has assets comprising reserves of 30, bonds of 50, and loans of 50, and on the liabilities side, it has deposits of 300 and equity of 30, the LCR would entail having enough liquid assets (like reserves and the most liquid bonds) to cover the net outflows for 30 days.