Ideally, liquid assets should be central bank eligible. There are two categories of assets: (1) Level 1 assets, which can be included without limit; and (2) Level 2 assets, which may only comprise 40% of the high-quality stock. Which of the following items is mostly likely a Level 2 asset?
A. Cash.
B. Central bank reserves.
C. Non-0% risk-weighted sovereign or central bank securities.
D. Marketable securities assigned a 20% risk-weighting.
Answer:D
Marketable securities assigned a 20% risk-weighting under Basel II is an example of a Level 2 asset. These securities must be traded in large, deep, active markets with low concentration and must be a proven reliable source of liquidity even in times of stress. They may not be the obligation of a financial institution (due to positive correlation and wrong-way risk). The other choices are examples of Level 1 assets.