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FRM Part II · FRM Exam Part II · Liquidity Stress Testing

A bank's combined stress scenario assumes a 3-notch downgrade. Its derivatives contracts contain rating triggers requiring additional collateral of USD 120 million, and secured funding of USD 500 million backed by securities will see haircuts rise from 4% to 10%. Which total additional liquidity need from these two effects should be included, ignoring other effects?

The additional need is USD 150 million: USD 120 million of rating-trigger collateral plus USD 30 million from the haircut increase (6 percentage points on USD 500 million of secured funding).

  1. AUSD 120 million
  2. BUSD 150 million
  3. CUSD 180 millionCorrect
  4. DUSD 270 million

Explanation

Higher haircuts on secured funding: the bank must fund more of the securities with its own cash. Securities value needed to back USD 500m at 4% haircut is the key; simplified, extra haircut = 500 x (10%-4%) = 30. Adding 120 gives 150, so the correct option is USD 150 million.

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