Skip to content

FRM Part II · FRM Exam Part II · Contingency Funding Planning

A bank concentrates its entire liquidity buffer in securities issued by its home government and held at a single custodian. Which weakness does this most directly create for the CFP?

The main weakness is concentration risk: if the home sovereign is stressed or the single custodian is disrupted, the bank may be unable to monetise the buffer at expected values. Diversifying across issuers, currencies and custody locations, and testing monetisation, strengthens the contingency funding plan.

  1. AConcentration risk that may impair monetisation if the sovereign is stressed or the custodian is disruptedCorrect
  2. BExcess diversification that lowers the buffer's yield
  3. CInability to use the securities in repo transactions
  4. DReduced need for stress testing of the buffer

Explanation

A buffer concentrated in one issuer and one custodian is exposed to wrong-way risk if the sovereign is stressed and to operational access risk at the custodian. Good practice is to diversify across issuers, currencies and locations and to test monetisation regularly.

Did you get it right without looking?

One question tells you little. A timed set on Contingency Funding Planning shows your real accuracy, how long you take and where you lose marks.

Practise Contingency Funding PlanningFree diagnostic mock

More Contingency Funding Planning questions