Skip to content

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

A bank's treasurer includes in counterbalancing capacity a portfolio of unencumbered corporate loans that could be pledged at the central bank. In a stress test, which adjustment is most appropriate for estimating the liquidity these loans would actually generate?

The treasurer should apply the central bank's collateral haircut and recognise the operational time needed to mobilise the loans. Counterbalancing capacity is measured by the cash actually obtainable in stress, not by book or par value, so haircuts and timing delays must be reflected.

  1. AValue them at book value because loans are held to maturity
  2. BApply the central bank's haircut and account for the operational time needed to mobilise the collateralCorrect
  3. CExclude haircuts but delay the cash by one year
  4. DCount them at par plus accrued interest because the central bank lends at policy rate

Explanation

Pledged assets generate cash equal to market or collateral value less the haircut, and operational lead times for pre-positioning and valuation mean cash may not be available immediately. Book value ignores haircuts and valuation, and the other options use unsupported adjustments.

Did you get it right without looking?

One question tells you little. A timed set on Liquidity Stress Testing shows your real accuracy, how long you take and where you lose marks.

Practise Liquidity Stress TestingFree diagnostic mock

More Liquidity Stress Testing questions