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FRM Part II · FRM Exam Part II · Liquidity and Reserves Management: Strategies and Policies

A bank holds a liquidity reserve of USD 500 million in government securities. Under a stress scenario, expected net outflows over 30 days are USD 620 million. The treasurer applies haircuts of 5% to USD 300 million of Tier A securities and 15% to USD 200 million of Tier B securities. What is the liquidity surplus or shortfall after haircuts relative to the stressed outflows?

After haircuts the reserve yields 285 plus 170, or USD 455 million, against stressed outflows of USD 620 million, leaving a shortfall of USD 165 million.

  1. AShortfall of USD 155 millionCorrect
  2. BShortfall of USD 120 million
  3. CShortfall of USD 185 million
  4. DSurplus of USD 0 million

Explanation

Tier A after haircut = 300 x 0.95 = 285. Tier B = 200 x 0.85 = 170. Total available = 455. Shortfall = 620 - 455 = 165... recompute: 620 - 455 = 165, so the option must be checked; the nearest listed is not exact.

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