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

A bank's stress test uses a 30-day horizon. Liquid assets after haircuts total USD 480 million. Stressed contractual and behavioral outflows are USD 900 million, and stressed inflows are USD 540 million. Based on the stressed net cash outflow, what is the bank's liquidity surplus or shortfall at day 30, assuming the liquid assets can be fully monetized?

The bank has a surplus of USD 120 million. Stressed net outflow is 900 minus 540, or 360 million, and the 480 million of haircut-adjusted liquid assets exceeds that by 120 million. Ignoring inflows would wrongly suggest a shortfall of 420 million.

  1. ASurplus of USD 120 millionCorrect
  2. BShortfall of USD 120 million
  3. CSurplus of USD 360 million
  4. DShortfall of USD 420 million

Explanation

Net stressed outflow = 900 - 540 = 360 million. Liquid assets of 480 million minus 360 million gives a surplus of 120 million. Ignoring inflows would give 480 - 900 = -420, the shortfall error in option D. Option C would result from reporting net outflow as the surplus.

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