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

A bank's liquidity policy sets a buffer at 110% of modelled 30-day stressed net outflows. After a deposit-mix change shifts funding toward uninsured wholesale deposits, modelled stressed outflows rise. What is the correct management response under stress-based sizing?

Management should recalculate the buffer from the higher stressed outflows and add reserves. Since the buffer is defined as a multiple of modelled stressed net outflows, a more runnable funding mix raises the requirement even though the policy percentage stays the same.

  1. AKeep the buffer unchanged because the policy percentage is unchanged
  2. BRecalculate the required buffer from the new stressed outflows and top up reserves accordinglyCorrect
  3. CReduce the buffer, because wholesale funding is cheaper
  4. DReplace stress testing with a historical average outflow measure

Explanation

Because the buffer is a multiple of modelled outflows, a rise in stressed outflows mechanically raises the required buffer. Keeping it unchanged leaves a shortfall, and historical averages understate stress.

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