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FRM Part II · FRM Exam Part II · Liquidity and Reserves Management: Strategies and Policies

A regional bank's treasurer is drafting a liquidity policy. Which element is most appropriate for a board-approved liquidity risk policy framework?

A board-approved liquidity policy should state the liquidity risk tolerance and include limits, escalation procedures and clear responsibilities. Daily trading instructions and fixed forecasts are operational or planning details, and relying only on central bank support is not a sound policy basis.

  1. ADaily trade-level execution instructions for the funding desk
  2. BA statement of liquidity risk tolerance, with limits, escalation procedures and assigned responsibilitiesCorrect
  3. CA fixed forecast of next year's deposit growth that management may not revise
  4. DA commitment to rely solely on central bank facilities in stress

Explanation

A policy framework sets the board's risk tolerance, limits, escalation paths and roles. Trade-level instructions are operational procedures, not policy. A fixed forecast is inflexible and not a policy element. Relying solely on central bank facilities is not a prudent contingency strategy.

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