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FRM Part II · FRM Exam Part II · Contingency Funding Planning

A bank's CFP lists a 30-day stress in which it expects to lose access to unsecured wholesale funding. Under supervisory guidance, which approach to the plan's liquid asset sources is most appropriate?

The bank should apply haircuts to liquid assets, confirm it can operationally monetize them within the stress horizon, and exclude encumbered assets. Counting book values, pledged securities or illiquid loans would overstate available liquidity in a 30-day stress.

  1. ACount all securities at book value because market prices are temporarily distorted in stress
  2. BApply haircuts to assets, consider operational ability to monetize them in time, and avoid counting encumbered assetsCorrect
  3. CCount assets already pledged for repo as available since they can be re-pledged immediately
  4. DCount illiquid loans as available since they can be sold over a longer horizon

Explanation

Guidance requires that stress sources reflect market value after haircuts, legal and operational ability to monetize within the horizon, and exclude encumbered assets. Book value ignores price falls, pledged assets are not free, and illiquid loans cannot be sold within 30 days without large losses.

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