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

A global bank relies on a correspondent to settle payments in a currency where it has no direct access to the payment system. A scenario analysis shows that if the correspondent suffers an operational outage, the bank would be unable to receive inflows of USD 600 million until midday and would still need to pay USD 450 million of time-critical obligations in the morning, with USD 200 million of unencumbered liquidity available to it in that currency. Under the principle on managing intraday liquidity in stress, which action is the most appropriate?

The bank should arrange and test additional intraday liquidity sources and contingency access in that currency to cover the USD 250 million shortfall, being USD 450 million of critical outflows minus USD 200 million available. Relying on a correspondent's goodwill or delaying critical payments does not meet the principle.

  1. ATreat the risk as immaterial because the outage is temporary and the bank is solvent
  2. BRely on the correspondent to extend unlimited intraday credit during the outage
  3. CDelay all outgoing payments until the correspondent resumes service, regardless of deadlines
  4. DHold or arrange additional intraday liquidity sources and contingency access in that currency to cover the USD 250 million shortfall, and test the planCorrect

Explanation

The shortfall is USD 450 million of critical outflows less USD 200 million available, equals USD 250 million, since inflows are blocked. The principle requires a bank to plan for stress, including disruption at a correspondent or in a system, and to hold contingency sources. Assuming unlimited credit or deferring time-critical payments would fail the principle and could harm counterparties.

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