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FRM Part II · FRM Exam Part II · Monitoring Liquidity

A bank's treasury prepares a contractual cash flow ladder to monitor liquidity. Which feature best describes the main limitation of relying only on contractual maturity gaps for liquidity monitoring?

The key limitation is that contractual gap analysis ignores behavioral cash flows such as deposit stickiness or runoff, drawdowns on committed facilities and prepayments. Actual cash timing can therefore differ materially from legal maturities, so contractual ladders must be supplemented with behavioral and stress assumptions.

  1. AIt ignores behavioral features such as deposit rollover, drawdowns of committed lines and prepaymentsCorrect
  2. BIt cannot be prepared for time buckets shorter than one year
  3. CIt requires market prices for every asset on the balance sheet
  4. DIt double counts inflows from assets that mature in more than one bucket

Explanation

A contractual ladder assumes cash flows occur at legal maturity. In practice, non-maturity deposits may run off or stay, credit lines may be drawn and loans may prepay, so the contractual view can misstate actual funding needs. The other options describe features that are not inherent limitations of the method.

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