FRM Part II · FRM Exam Part II · Liquidity Risk Reporting and Stress Testing
A bank's baseline survival horizon under an idiosyncratic stress is 60 days. In a combined idiosyncratic and market-wide stress it falls to 25 days, and the CFP lists asset sales that are estimated to raise USD 300 million but assume normal market haircuts. Which is the most appropriate risk management conclusion?
The bank should base its assessment on the 25-day combined-stress horizon and re-estimate the asset sale proceeds using stressed haircuts and limited market capacity. Contingency actions are less effective in market-wide stress, so the listed USD 300 million is probably overstated and the milder results are not conservative.
- AUse the 60-day result for limit setting because it is the least conservative
- BAverage the two horizons to 42.5 days for reporting
- CAdopt the 25-day result and re-estimate the CFP asset sale proceeds using stressed haircuts and market capacityCorrect
- DTreat the CFP proceeds as certain since they are already listed
Explanation
Limits and planning should reflect the most severe plausible scenario, and CFP actions must be valued consistently with it. Asset sales in a market-wide stress face larger haircuts and limited buyers, so the USD 300 million is likely overstated. Averaging or using the mildest result understates risk.
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