FRM Part II · FRM Exam Part II · Monitoring Liquidity
A bank's treasury prepares a contractual cash flow maturity ladder to monitor liquidity. Which feature best describes the main limitation of relying only on this contractual ladder?
The main limitation of a purely contractual maturity ladder is that it ignores behavioral features such as deposit rollover, prepayments and drawdowns on committed lines. Flows are placed at legal maturity, so actual liquidity needs can differ materially from what the ladder shows.
- AIt ignores behavioral features such as deposit rollover and drawdowns on committed linesCorrect
- BIt cannot be produced for periods shorter than one year
- CIt includes only on-balance-sheet assets and no liabilities
- DIt requires market prices for every loan in the portfolio
Explanation
A contractual ladder places flows at legal maturity dates. It misses behavioral outcomes such as core deposits being rolled over or customers drawing on committed facilities, so it can misstate real liquidity needs. The other options are false: ladders can be built for overnight buckets, they include liabilities, and they do not need loan market prices.
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