FRM Part II · FRM Exam Part II · Liquidity Stress Testing
A bank's treasury is building a 30-day liquidity stress test for its retail deposit book. Which approach to modeling deposit outflows is most consistent with sound practice for behavioral assumptions?
Segmenting deposits by customer type, insurance coverage and relationship depth, and applying differentiated stressed runoff rates, is sound practice. Behavior differs across segments, so contractual maturities or calm-period averages understate stressed outflows and make the stress test unreliable.
- AApply the same contractual maturity runoff to all deposits because contractual terms fully determine customer behavior
- BSegment deposits by customer type, insurance coverage and relationship depth, and apply differentiated stressed runoff ratesCorrect
- CAssume zero outflows from insured deposits under every scenario regardless of the severity of the stress
- DApply a single average historical outflow rate from calm periods to all deposit segments
Explanation
Behavioral outflows differ across segments: uninsured, rate-sensitive and non-relationship deposits run faster than insured, transactional ones. Contractual maturity alone ignores withdrawal on demand, and calm-period averages understate stress behavior.
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