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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 best reflects a stress-based sizing of the buffer under sound liquidity reserves management?

The buffer should be sized to cover projected net cash outflows over a defined stress horizon under severe but plausible scenarios. This ties reserves to the bank's actual funding vulnerabilities rather than to arbitrary asset ratios, average past flows or capital requirements.

  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 over a defined stress horizon under severe but plausible scenariosCorrect
  3. CSize the buffer to equal the average daily net outflow observed in the last year
  4. DSize the buffer to match the bank's regulatory capital requirement

Explanation

Stress-based sizing links the buffer to modelled net outflows over a survival horizon under severe but plausible stress. A fixed percentage of assets ignores the funding profile, and average historical outflows ignore stress conditions. Capital and liquidity are distinct resources.

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