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FRM Exam Part II · Liquidity Stress Testing

Cash Flow Projection and Behavioral Assumptions in Liquidity Stress Testing

Updated 11 October 2026 · Fact-checked

Cash flow projection in a liquidity stress test forecasts inflows and outflows over set time buckets under stress. You apply behavioral assumptions: run-off rates on deposits, drawdown rates on committed lines, collateral calls and rollover rates on maturing funding. You then compare net outflows with the liquidity buffer to find the shortfall or survival horizon.

Understand Cash Flow Projection and Behavioral Assumptions

A liquidity stress test asks one question: if conditions turn bad, can the bank meet every payment as it falls due? To answer it, you project cash in and cash out over time buckets, such as overnight, one week, one month and three months.

Contractual cash flows are the starting point. They follow the legal maturity of each asset and liability. But in stress, people do not behave as the contract says. Depositors withdraw early. Borrowers draw on credit lines. Counterparties demand more collateral. Lenders refuse to roll over funding. These are behavioral assumptions.

The main assumptions are these:

  • Deposit run-off rate: the share of a deposit balance withdrawn in the stress period. Insured, stable retail deposits run off least. Uninsured wholesale and corporate deposits run off most.
  • Drawdown rate: the share of an undrawn committed credit or liquidity facility that clients use. Liquidity facilities to financial firms are usually assumed to be drawn more than facilities to retail clients.
  • Collateral calls: extra margin or collateral needed after a rating downgrade, a fall in collateral value, or a market move on derivatives.
  • Rollover rate: the share of maturing funding that is renewed. A 0% rollover means the full maturing amount is a cash outflow.

Assumptions are asymmetric. You haircut inflows, because borrowers may not repay on time or the bank may need to keep lending to core clients. You apply high rates to outflows. Assumptions should also depend on the scenario: idiosyncratic, market-wide or combined. Combined scenarios are usually harshest.

The result is a net cumulative cash flow by bucket. You compare it with the liquidity buffer, or counterbalancing capacity. The point where the buffer runs out is the survival horizon. Regulatory ratios such as the LCR use prescribed run-off and drawdown factors. Internal stress tests often use harsher, bank-specific factors.

Key formulas to remember

Stressed outflow from deposits
Outflow = Balance × run-off rate
Use a different rate for each deposit category, then sum.
Credit line drawdown
Drawdown = Undrawn committed amount × drawdown rate
Apply to the undrawn part only. Drawn balances are already on the balance sheet.
Rollover shortfall
Outflow = Maturing funding × (1 − rollover rate)
Only the part not renewed is a net cash outflow.
Stressed inflow
Inflow = Contractual inflow × (1 − haircut)
Inflows are reduced because not all will be received in stress.
Net cash flow
Net = Stressed inflows − Stressed outflows (including collateral calls)
A negative number is a funding need.
Cumulative gap and survival
Cumulative net flow + Buffer ≥ 0 at each bucket
Survival horizon is the last bucket where this holds.

How to solve Cash Flow Projection and Behavioral Assumptions questions

Use the same structure for any question on projecting stressed cash flows. Work bucket by bucket and keep inflows and outflows separate.

  1. 1Identify the scenario and horizon, for example a 30-day combined stress, and read the given assumptions carefully.
  2. 2List contractual inflows and outflows in each time bucket.
  3. 3Apply behavioral assumptions to outflows: deposit run-off, drawdowns on undrawn lines, and non-rollover of maturing funding.
  4. 4Add collateral calls from downgrades or market moves as extra outflows.
  5. 5Haircut inflows as instructed, and remove any inflow the bank must reinvest.
  6. 6Compute net cash flow per bucket, then the cumulative net flow.
  7. 7Add the liquidity buffer, after any haircuts on its assets, and find the shortfall or survival horizon.
  8. 8Interpret: state whether the bank survives, what drives the gap, and what action fits (more buffer, longer funding, tighter limits).

Quickest way: Rate times balance, then net against the buffer

When to use it: Use when the question gives balances and percentage assumptions and asks for total outflow, net outflow or the buffer shortfall.

  1. Multiply each balance by its percentage and write the outflow next to it.
  2. For drawdowns, use only the undrawn amount. For rollover, use 1 minus the rollover rate.
  3. Sum all outflows and add collateral calls.
  4. Subtract haircut inflows.
  5. Compare net outflow with the buffer after its haircut and pick the option that matches.

Common mistakes in Cash Flow Projection and Behavioral Assumptions

  • Applying the drawdown rate to the whole commitment instead of the undrawn part.

    The facility size is the headline number in the question.

    Fix: Subtract drawn amounts first. Drawdown = undrawn × rate.

  • Using the rollover rate as the outflow rate.

    Both are percentages and look alike.

    Fix: Outflow = maturing amount × (1 − rollover rate). A 70% rollover means 30% leaves.

  • Treating inflows at full contractual value.

    Inflows feel certain, as they are contractual.

    Fix: Apply the stated inflow haircut. In stress, borrowers delay and the bank keeps lending to core clients.

  • Ignoring collateral calls and downgrade triggers.

    They are not on the maturity ladder.

    Fix: Add them as separate outflows, sized by the trigger given in the scenario.

  • Using the same run-off rate for all deposits.

    Deposits are seen as one funding pool.

    Fix: Split by type: insured retail, less stable retail, uninsured corporate and wholesale. Higher rates apply to flighty money.

  • Counting the full market value of buffer assets.

    The buffer is read as cash.

    Fix: Apply haircuts to securities and count only unencumbered assets that can be monetised.

Worked examples

Example 1

A bank has USD 800 million of stable retail deposits (run-off 5%), USD 500 million of uninsured corporate deposits (run-off 40%), and USD 200 million of wholesale funding maturing in 30 days with a 25% rollover rate. Contractual loan inflows in 30 days are USD 150 million with a 50% haircut. The buffer is USD 220 million. What is the 30-day net outflow and the surplus or shortfall?

Show the solution
  1. Retail run-off: 800 × 5% = USD 40 million.
  2. Corporate run-off: 500 × 40% = USD 200 million.
  3. Wholesale non-rollover: 200 × (1 − 0.25) = USD 150 million.
  4. Total outflows: 40 + 200 + 150 = USD 390 million.
  5. Stressed inflows: 150 × (1 − 0.50) = USD 75 million.
  6. Net outflow: 390 − 75 = USD 315 million.
  7. Buffer minus net outflow: 220 − 315 = −USD 95 million.

Answer: Net 30-day outflow is USD 315 million, leaving a shortfall of USD 95 million against the USD 220 million buffer.

Example 2

A bank has a EUR 600 million committed credit line to corporates, of which EUR 200 million is already drawn. It assumes a 30% drawdown rate on the undrawn part. A downgrade would trigger EUR 45 million of extra derivative collateral. The bank holds a EUR 150 million buffer. Ignoring other flows, what is the buffer left after this stress?

Show the solution
  1. Undrawn amount: 600 − 200 = EUR 400 million.
  2. Drawdown: 400 × 30% = EUR 120 million.
  3. Add collateral call: 120 + 45 = EUR 165 million.
  4. Buffer after stress: 150 − 165 = −EUR 15 million.

Answer: Stressed outflows are EUR 165 million, so the buffer is short by EUR 15 million.

Exam tips

  • Check whether a percentage is a run-off, drawdown, rollover or haircut rate. Questions often swap the wording to test this.
  • Apply drawdown rates to undrawn amounts only.
  • Expect conceptual questions on why behavioral assumptions beat contractual maturities in stress, and on why assumptions differ across deposit types and counterparties.
  • Combined (idiosyncratic plus market-wide) scenarios are harsher than either alone. Pick that when asked which is most severe.
  • Do the arithmetic bucket by bucket, then compare with the buffer. Eliminate options that miss collateral calls.

Practice questions from Liquidity Stress Testing

Cash Flow Projection and Behavioral Assumptions: frequently asked questions

What is a deposit run-off rate in a liquidity stress test?

It is the percentage of a deposit balance assumed to be withdrawn during the stress period. Stable insured retail deposits get low rates, while uninsured corporate and wholesale deposits get high rates. Outflow equals balance times the run-off rate.

Why use behavioral assumptions instead of contractual maturities?

In stress, customers and counterparties act differently from the contract. Depositors leave early, clients draw on lines and lenders do not roll over. Contractual maturities would understate outflows and overstate survival time.

How do you project cash flows in a liquidity stress test?

Set the scenario and horizon, list contractual flows by time bucket, and apply behavioral assumptions to inflows and outflows. Add collateral calls, compute net and cumulative flows, then compare with the liquidity buffer to find the shortfall or survival horizon.

Are the LCR run-off rates the same as internal stress test rates?

No. The LCR uses prescribed factors set by regulators. Internal stress tests should reflect the bank's own funding profile and scenarios, and can be harsher than the regulatory factors.