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FRM Part II · FRM Exam Part II · Liquidity Risk Management

A bank's liquidity stress test assumes a severe combined market and idiosyncratic scenario. Which design feature would most undermine the usefulness of the stress test for contingency funding planning?

Assuming wholesale funding rolls over at pre-stress terms undermines the test. Stress scenarios must capture lost or costlier funding, particularly when the bank's own credit standing deteriorates. Higher haircuts, intraday stress and multiple horizons all make the test more realistic.

  1. AAssuming that collateral haircuts rise and counterparties shorten funding tenors during the stress
  2. BAssuming that the bank can continue to roll over wholesale funding at pre-stress terms because its credit rating is currently strongCorrect
  3. CIncluding a separate intraday liquidity stress for payment system obligations
  4. DRunning the scenario over multiple horizons such as overnight, one week and one month

Explanation

A stress test should reflect that funding sources can become unavailable or costlier, especially in an idiosyncratic event. Assuming unchanged rollover terms based on the current rating ignores the rating-driven and confidence-driven run-off the test is meant to capture. The other features are sound practice.

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