Skip to content

FRM Part II · FRM Exam Part II · Contingency Funding Planning

A bank's treasurer is reviewing the role of the liquidity buffer within the contingency funding plan (CFP). Which statement best describes the primary purpose of holding a buffer of unencumbered high-quality liquid assets?

A liquidity buffer of unencumbered high-quality liquid assets exists to supply cash quickly during stress, buying time while the contingency funding plan's other actions are carried out. It is not meant to maximise yield, replace stress testing, or meet accounting classification needs.

  1. ATo provide a source of funds that can be monetised quickly during stress while the CFP actions are being implementedCorrect
  2. BTo maximise net interest margin by holding the highest-yielding marketable securities
  3. CTo replace the need for any stress testing of funding outflows
  4. DTo satisfy accounting requirements for classifying securities as held to maturity

Explanation

The buffer gives the bank time during stress: assets that are unencumbered and easily sold or repoed bridge the gap while longer-term contingent actions are executed. Yield maximisation is not its purpose, and the buffer does not replace stress testing, which sizes it. Accounting classification is unrelated.

Did you get it right without looking?

One question tells you little. A timed set on Contingency Funding Planning shows your real accuracy, how long you take and where you lose marks.

Practise Contingency Funding PlanningFree diagnostic mock

More Contingency Funding Planning questions