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FRM Part II · FRM Exam Part II · Monitoring Liquidity

A liquidity risk manager reviews a gap report showing a large negative cumulative gap in the 0-7 day bucket but a large positive cumulative gap in the 3-12 month buckets. Which interpretation and action is most appropriate?

The near-term negative gap is a real rollover and funding risk, because inflows months away cannot pay obligations due within a week. Management should set limits on short-bucket cumulative gaps and hold sufficient liquid buffers or contingent funding rather than relying on the long-term surplus.

  1. AThe bank faces little risk because the long-term surplus offsets the near-term shortfall
  2. BThe near-term shortfall is a rollover and funding risk that should be managed with limits on short-bucket gaps, since long-term surpluses cannot meet immediate obligationsCorrect
  3. CThe bank should stop preparing gap reports because they conflict across buckets
  4. DThe positive long-term gap means the bank should increase overnight wholesale borrowing

Explanation

Liquidity gaps are time-specific: obligations due in the first week must be met then, and surpluses arriving months later do not help. Managers therefore set limits on short-term cumulative gaps and ensure buffers or funding access. Option A wrongly nets across time, and D worsens the near-term mismatch.

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