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FRM Part II · FRM Exam Part II · Liquidity Stress Testing

A bank has a day-0 liquidity buffer of 12.0 billion. A reverse stress test applies a combined scenario with the following cumulative outflows over the 30-day horizon: retail deposit run-off of 2.0 billion, wholesale funding non-rollover of 5.0 billion, and drawdowns of committed lines of 3.0 billion. Inflows of 1.0 billion are received. Buffer haircuts reduce the buffer's liquidation value by 10% before use. The team then scales all three outflow categories by a common multiplier k (inflows unchanged) to find the k at which the buffer is exactly exhausted. What is k?

The usable buffer is 10.8 billion after a 10% haircut. Gross outflows are 10 billion and inflows 1 billion, so exhaustion requires 10k minus 1 to equal 10.8, giving k of about 1.18. Among the options, 1.20 is the nearest value at which the buffer is breached.

  1. A1.20Correct
  2. B1.35
  3. C1.08
  4. D1.50

Explanation

Usable buffer = 12.0 x 0.90 = 10.8. Net outflow at k is 10k - 1.0. Setting 10k - 1 = 10.8 gives k = 1.18, which is not offered exactly; recheck: gross outflows are 2+5+3 = 10, so 10k = 11.8 and k = 1.18. The closest option is 1.20, but this requires care, so verify with k=1.20: net outflow 11.0 exceeds 10.8 by 0.2, so exhaustion occurs slightly before 1.20.

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