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FRM Part II · FRM Exam Part II · Intraday Liquidity Risk Management

A bank delays sending its outgoing payments until late in the day, relying on incoming payments from other participants to fund them. If many banks behave this way, what is the most likely systemic consequence?

If many banks delay outgoing payments while waiting for incoming ones, payments bunch late in the day, creating gridlock and a higher chance of failed settlements. Mutual dependence prevents liquidity from recycling smoothly, so intraday liquidity risk rises across the system.

  1. APayments gridlock, with settlement concentrated late in the day and increased risk of failures to settleCorrect
  2. BLower overall demand for intraday liquidity because payments net out
  3. CFaster settlement because liquidity is recycled more efficiently
  4. DElimination of settlement risk due to reliance on incoming funds

Explanation

When banks wait for incoming payments before paying, each depends on the others and payment flows bunch late in the day. This raises the chance of gridlock and failed settlement, and increases liquidity demand. Recycling only works when payments are sent smoothly.

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