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FRM Part II · FRM Exam Part II · Liquidity Risk Reporting and Stress Testing

A bank's survival horizon under its internal stress test is calculated as follows. Opening liquidity buffer is $12 billion. Stressed net cash outflows are $3.0 billion in week 1, $2.5 billion in week 2, $2.0 billion in week 3, and $1.5 billion in each subsequent week. Ignoring any further actions, in which week does the buffer first become exhausted (cumulative outflows exceed $12 billion)?

The buffer is exhausted in week 7. Cumulative outflows reach $10.5 billion after week 5 and exactly $12 billion after week 6, which uses the buffer fully, so week 7 outflows of $1.5 billion are the first to exceed it. The survival horizon is therefore six weeks.

  1. AWeek 4
  2. BWeek 5
  3. CWeek 6Correct
  4. DWeek 7

Explanation

Cumulative outflows: week 1 = 3.0; week 2 = 5.5; week 3 = 7.5; week 4 = 9.0; week 5 = 10.5; week 6 = 12.0; week 7 = 13.5. At end of week 6 cumulative equals exactly 12.0, so the buffer is fully used but not exceeded; it is exceeded in week 7. Check: remaining after week 5 is 1.5, equal to week 6 outflow, leaving zero.

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