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

A bank's CFP stress scenario assumes a 30-day horizon. Unsecured wholesale funding of USD 800 million matures within the period and cannot be rolled over. Retail deposits of USD 2,000 million run off at 5%. Committed credit lines drawn by clients add USD 150 million of outflows. Unencumbered liquid assets of USD 900 million can be sold at an average 10% haircut. What is the net liquidity surplus or shortfall?

The bank faces a shortfall of USD 240 million. Outflows total 1,050 million (800 wholesale, 100 retail runoff, 150 drawn lines), while liquid assets generate only 810 million after a 10% haircut on 900 million. Net position is 810 minus 1,050.

  1. AShortfall of USD 240 millionCorrect
  2. BShortfall of USD 140 million
  3. CSurplus of USD 10 million
  4. DShortfall of USD 50 million

Explanation

Outflows = 800 + 0.05×2,000 (=100) + 150 = 1,050. Sources = 900×0.90 = 810. Net = 810 − 1,050 = −240, a shortfall of USD 240 million. The 140 figure arises from ignoring the haircut incorrectly on a different base; omitting the haircut gives −150.

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