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

A bank's treasury head is asked what the 'survival horizon' measures in a liquidity stress test. Which statement is correct?

Survival horizon is the number of days a bank can meet its stressed net cash outflows using its liquidity buffer and other counterbalancing capacity before liquidity is exhausted. It is not about asset maturity or capital recovery.

  1. AThe number of days the bank can meet net cash outflows under the stress scenario using its liquidity buffer and other counterbalancing capacity before it runs out of liquidityCorrect
  2. BThe maturity of the longest-dated asset held in the liquidity buffer
  3. CThe time needed for the bank's regulatory capital ratio to recover to its pre-stress level
  4. DThe number of days of stressed outflows covered by the bank's average daily retail deposits

Explanation

Survival horizon is the length of time a bank can withstand a stress scenario, meaning the point at which cumulative stressed net outflows exhaust available counterbalancing capacity. It is a liquidity concept, not a capital recovery or asset maturity measure. The other options confuse it with maturity, capital, or deposit coverage.

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