FRM Part II · FRM Exam Part II · Liquidity Stress Testing
A bank's treasury is building a 30-day liquidity stress test. For retail demand deposits that are fully insured and held in operational accounts, which assumption about run-off is most consistent with sound practice?
Insured retail operational deposits should receive a lower run-off rate than uninsured wholesale funding because they are behaviorally stickier. Contractual availability on demand does not imply full withdrawal, while assuming zero run-off ignores stress, so differentiated, non-zero rates are the sound approach.
- AApply a lower run-off rate than for uninsured wholesale deposits, reflecting stickier behaviorCorrect
- BApply a 100% run-off because demand deposits can be withdrawn at any time
- CApply the same run-off as unsecured interbank funding because both are unsecured
- DApply a 0% run-off because insured deposits never leave under any scenario
Explanation
Behavioral assumptions differentiate by counterparty type, insurance coverage and relationship. Insured operational retail deposits are stickier than uninsured wholesale funding, so they carry lower run-off. A 100% or equal-to-interbank rate ignores behavior, and 0% is unrealistically optimistic.
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