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FRM Part II · FRM Exam Part II · Liquidity and Reserves Management: Strategies and Policies

A bank's treasurer is deciding how large a liquidity buffer to hold. Which approach is most consistent with sound stress-based sizing of a liquidity buffer?

The buffer should be sized to cover projected net cash outflows under severe but plausible stress scenarios over a defined survival horizon. This ties the buffer to the bank's actual funding vulnerabilities rather than to asset size, historical averages, or normal-condition minimums.

  1. ASet the buffer as a fixed percentage of total assets regardless of funding structure
  2. BSize the buffer to cover projected net cash outflows under severe but plausible stress scenarios over a defined survival horizonCorrect
  3. CSize the buffer to equal the average daily net cash outflow observed in the last year
  4. DHold only the amount required to meet the regulatory minimum in normal conditions

Explanation

Stress-based sizing links the buffer to modeled net outflows under severe but plausible scenarios over a survival horizon. A fixed percentage of assets ignores the funding profile. Average historical outflows and normal-condition minimums ignore stress behavior.

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