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

A bank tests the reliability of its contingency funding sources. Which of the following contingent sources is most likely to be unavailable or unreliable in a systemic, market-wide liquidity crisis?

Selling securities into a market where all banks are simultaneously selling the same asset class is least reliable in a systemic crisis. Market depth disappears and prices fall, whereas central bank reserves and pre-positioned collateral facilities do not depend on private-market capacity.

  1. ABorrowing from the central bank against pre-positioned collateral
  2. BSelling a block of securities in a market where all banks are simultaneously seeking to sell the same asset classCorrect
  3. CDrawing on the bank's own cash held at the central bank
  4. DUsing high-quality government bonds for repo with the central bank

Explanation

In market-wide stress, asset sales and private-market funding depend on counterparties with capacity, and prices fall as everyone sells the same assets, so the source becomes unreliable. Central bank facilities and reserves are more dependable because they do not rely on market depth.

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