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

A bank's stress test assumes a severe scenario in which its credit rating is downgraded by three notches. Which of the following effects should be explicitly modeled as a scenario driver because it directly increases liquidity needs?

Contractual collateral calls under derivative agreements with rating triggers should be modeled. A downgrade makes these provisions activate, creating immediate cash or collateral outflows. The other items concern capital, accounting values or earnings and do not directly produce liquidity needs within the stress horizon.

  1. AContractual collateral calls under derivative agreements with rating-based triggersCorrect
  2. BA reduction in the bank's regulatory capital ratio due to higher risk-weighted assets
  3. CA decline in the accounting value of goodwill
  4. DAn increase in the bank's reported net interest margin

Explanation

Rating-triggered collateral and termination provisions create immediate cash or collateral outflows after a downgrade. Capital ratio changes, goodwill and net interest margin are not direct liquidity drivers in the stress horizon.

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