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FRM Part II · FRM Exam Part II · Intraday Liquidity Risk Management

A global bank operates in several currencies and settles through multiple payment and settlement systems, some via correspondents. The head of treasury is designing intraday stress scenarios consistent with supervisory principles. Which design is most appropriate?

The best design combines own-bank stress, counterparty stress such as a correspondent failure, and market-wide disruption, and assesses effects on available liquidity sources and expected flows across all material currencies and payment systems. Single-currency, market-only or uniform-buffer approaches miss important channels of intraday stress.

  1. AUse a single idiosyncratic scenario in the home currency since other currencies are covered by the LCR
  2. BUse only market-wide scenarios, because idiosyncratic events cannot affect intraday flows
  3. CUse scenarios including own-bank stress such as a rating downgrade, counterparty stress such as a correspondent or large customer failing to pay, and market-wide disruption, assessing the impact on available sources and expected flows across material currencies and systemsCorrect
  4. DUse historical average intraday flows with a 10% buffer applied uniformly to all currencies

Explanation

Supervisory guidance expects stress scenarios covering own-bank, counterparty and market-wide events, considering their effect on both intraday sources (such as collateral values and credit lines) and flows, across material currencies and systems. The single home-currency scenario ignores currency and system concentration. Idiosyncratic events clearly can affect flows. A uniform buffer on averages is not a stress test.

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