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

A bank's contingency funding plan (CFP) lists sources of contingent liquidity. Which of the following is the most appropriate characteristic of a high-quality liquidity buffer asset for use in a stress event?

A good buffer asset is unencumbered and can be turned into cash quickly with little price loss, through sale or repo. Pledged assets or held-to-maturity loans are not reliably available in stress, and high yield is not the criterion for contingent liquidity.

  1. AIt is unencumbered and can be monetized quickly with little loss of value, including through repo or outright saleCorrect
  2. BIt offers the highest yield available among marketable securities
  3. CIt is pledged to a long-term secured funding program to maximize collateral usage
  4. DIt is a hold-to-maturity loan that is expected to be repaid at contractual maturity

Explanation

Liquidity buffer assets must be unencumbered and convertible to cash quickly with minimal discount, via sale or secured borrowing. Pledged assets are unavailable, and loans held to maturity cannot be monetized quickly. Yield is not the key criterion for stress liquidity.

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