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FRM Part II · FRM Exam Part II · Liquidity Stress Testing

A bank's treasury defines its survival horizon under a liquidity stress test. Which statement best describes this measure?

Survival horizon is the length of time a bank can cover its cumulative stressed net cash outflows using its liquidity buffer and other counterbalancing capacity, without extraordinary outside support. It is a liquidity measure, not a capital recovery time or a liability maturity.

  1. AThe length of time the bank can meet its net stressed cash outflows using its counterbalancing capacity without relying on extraordinary external supportCorrect
  2. BThe maturity of the longest-dated liability on the bank's balance sheet
  3. CThe time needed for the bank to raise new equity after a stress event
  4. DThe period over which the bank's regulatory capital ratio recovers to its target after a shock

Explanation

Survival horizon is the number of days for which a bank's liquidity buffer and other counterbalancing capacity cover cumulative stressed net outflows. It is a liquidity measure, not a capital or funding-maturity measure. The other options confuse it with capital recovery, equity issuance or liability tenor.

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