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

A bank's treasury team builds a 30-day liquidity stress test. For retail demand deposits that are fully insured and held in transactional accounts, which approach to the run-off assumption is most consistent with sound practice?

Insured transactional retail deposits should receive a lower run-off rate than uninsured wholesale funding, calibrated to historical behaviour and stress episodes. Zero run-off is unrealistic because depositors can still withdraw, and a contractual 100% run-off ignores the observed stickiness of these deposits.

  1. AApply a lower run-off rate than for uninsured wholesale deposits, calibrated to historical behaviour and stress eventsCorrect
  2. BApply a 100% run-off because all deposits are contractually repayable on demand
  3. CApply a 0% run-off because insured deposits cannot leave the bank
  4. DApply the same run-off rate as for unsecured interbank funding to remain conservative

Explanation

Insured, transactional retail deposits are historically stickier than uninsured or wholesale balances, so stress tests apply lower but non-zero run-off rates. A 100% run-off ignores behavioural evidence, and 0% ignores that insured depositors can still withdraw.

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