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

A bank's treasury team is designing its liquidity stress testing program. Which of the following best describes the primary purpose of a liquidity stress test?

A liquidity stress test checks whether a bank can meet its cash outflows as they fall due under severe but plausible adverse scenarios, and it reveals funding vulnerabilities. It is about survival horizons and cash-flow timing, not capital adequacy against credit losses or a single statistical confidence measure.

  1. ATo estimate the capital buffer required to absorb credit losses over a one-year horizon
  2. BTo assess whether the bank can meet its cash outflows under adverse but plausible scenarios and to identify vulnerabilities in its funding profileCorrect
  3. CTo calculate the expected profit from funding activities under normal market conditions
  4. DTo produce a single statistical liquidity measure at a 99% confidence level

Explanation

Liquidity stress testing examines whether a bank can meet its obligations as they fall due under severe but plausible shocks, and it exposes funding and asset-liquidity weaknesses. Capital-loss estimation is the purpose of solvency stress tests. A VaR-style single statistic does not capture the cash-flow timing that liquidity stress tests focus on.

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