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FRM Part II · FRM Exam Part II · Liquidity Risk Reporting and Stress Testing

A bank reports a contractual maturity ladder showing a cumulative funding gap. Which feature makes a behaviorally adjusted maturity ladder more informative for liquidity risk management than a purely contractual ladder?

A behaviorally adjusted maturity ladder is more informative because it reflects expected customer behavior, such as deposit stickiness, drawdowns on committed lines and prepayments, rather than only contractual maturities. This gives a more realistic view of cash flows and funding gaps.

  1. AIt assumes all liabilities roll off on their contractual dates
  2. BIt reflects expected behavior such as deposit stickiness, drawdowns on committed lines, and prepaymentsCorrect
  3. CIt eliminates the need to set limits on cumulative gaps
  4. DIt only includes assets that are eligible as HQLA

Explanation

A behavioral ladder incorporates assumptions about how customers actually act, such as stable core deposits and credit line drawdowns, giving a more realistic view of cash flows. A contractual ladder assumes legal maturities only. Limits remain necessary and the ladder covers all flows, not only HQLA.

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