Skip to content

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

A bank's treasurer is reviewing which assets to count as part of the liquidity buffer that supports its contingency funding plan (CFP) during a severe stress. Which of the following assets is most appropriate to include as a reliable contingent funding source?

Unencumbered government securities that are central bank eligible are the best choice, because they can be sold or repoed quickly with little price loss in stress. Pledged securities are already encumbered, and loans or unrated structured products are illiquid and unreliable as contingent funding when markets are disrupted.

  1. AUnencumbered government securities that are eligible at the central bank and can be sold or repoed quicklyCorrect
  2. BLong-dated loans to mid-sized corporate borrowers that are performing
  3. CSecurities already pledged as collateral for existing repo borrowing
  4. DUnrated structured credit tranches held in the banking book

Explanation

A reliable buffer consists of unencumbered, high-quality assets that can be monetised quickly through sale or repo with little loss of value. Pledged securities are already encumbered and cannot be used again. Performing loans and unrated structured tranches are illiquid and may only be sold at deep discounts in stress.

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