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

A bank's stress testing framework defines a survival horizon. Which of the following best describes how the survival horizon is used?

The survival horizon is how long a bank can keep meeting its obligations under a stress scenario using its liquidity buffer before external support or corrective action is needed. Management compares it with a minimum required horizon, so it is a liquidity metric rather than a maturity, approval or disclosure measure.

  1. AIt is the period over which the bank can continue to meet its obligations under a stress scenario using its liquidity buffer, before needing external support or corrective actionCorrect
  2. BIt is the average maturity of the bank's liabilities, used to set the interest rate hedge
  3. CIt is the time required for regulators to approve a bank's capital plan
  4. DIt is the fixed number of days after which stress test results must be disclosed publicly

Explanation

The survival horizon measures how long the bank can withstand a stress scenario using available liquid resources and planned actions. Management compares it to a minimum required horizon and to the time needed for contingency actions. It is unrelated to liability maturity averages, regulatory approvals or disclosure timing.

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