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

A bank reports a cumulative liquidity gap table. Over the 0-7 day bucket, contractual inflows are USD 200 million and outflows are USD 260 million. In the 8-30 day bucket, inflows are USD 340 million and outflows are USD 300 million. What are the cumulative gap at day 30 and the main limitation of relying only on this contractual gap?

The cumulative day-30 gap is negative USD 20 million: minus 60 in the first bucket plus 40 in the second. The key limitation is that a contractual gap uses stated maturities and ignores behavioral and stress effects such as deposit runoff or failed rollovers.

  1. ACumulative gap is -USD 20 million; it ignores behavioral and stressed assumptions such as deposit runoff and rollover failureCorrect
  2. BCumulative gap is +USD 40 million; it ignores behavioral and stressed assumptions such as deposit runoff and rollover failure
  3. CCumulative gap is -USD 20 million; it is invalid because gaps cannot be cumulated across buckets
  4. DCumulative gap is -USD 60 million; it overstates liquidity risk because it assumes all assets are sold

Explanation

Bucket 1 gap = 200 - 260 = -60. Bucket 2 gap = 340 - 300 = +40. Cumulative = -20 million. Contractual gaps rely on stated maturities and miss behavioral changes under stress, so they should be supplemented with stress scenarios. Option +40 ignores the first bucket.

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