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

A bank's stress test shows it survives 45 days under its severe scenario, while its internal risk appetite requires a minimum survival horizon of 60 days. What is the most appropriate management response?

The bank should escalate the breach of its 60-day appetite and consider remedies such as a larger liquid asset buffer or longer funding maturities. Weakening the scenario or removing contingent outflows would hide the risk rather than address it.

  1. ATake no action because any survival horizon above 30 days satisfies Basel requirements
  2. BReduce the severity of the scenario until the survival horizon reaches 60 days
  3. CExclude contingent outflows from the next test to lengthen the horizon
  4. DEscalate the breach and consider actions such as increasing the high-quality liquid asset buffer or lengthening funding maturitiesCorrect

Explanation

A survival horizon below the risk appetite is a limit breach that should be escalated, with remedial actions such as a larger buffer or longer-term funding. Softening the scenario or dropping contingent outflows would manipulate the test rather than manage the risk, and regulatory minimums do not replace the internal appetite.

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