FRM Part II · FRM Exam Part II · Liquidity Risk
A bank's treasurer notes that the bank may be unable to meet cash outflows as they fall due without incurring unacceptable losses or disrupting operations, even though its assets exceed its liabilities in value. Which type of risk is this describing?
This is funding liquidity risk: the danger that a firm cannot meet cash obligations when due without unacceptable losses, even if its assets exceed its liabilities. It differs from market liquidity risk, which concerns the price impact of selling assets.
- AFunding liquidity riskCorrect
- BMarket liquidity risk
- CBasis risk
- DSettlement risk
Explanation
Funding liquidity risk is the risk that a firm cannot meet its payment obligations as they come due, even if it is solvent on a balance-sheet basis. Market liquidity risk concerns the inability to trade assets without significant price impact, which is a different problem. Basis and settlement risk do not describe a general inability to meet obligations.
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