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

A regional bank's treasurer is reviewing the purpose of its contingency funding plan (CFP). Which statement best describes the primary role of a CFP?

A contingency funding plan pre-defines the emergency funding sources, management actions, and responsibilities the bank will use when normal funding is disrupted. It is a crisis-response framework that complements stress testing, not a daily reserve target or a deposit pricing policy.

  1. AIt sets out in advance the sources of emergency funding, the actions, and the responsibilities to be used when normal funding sources are disruptedCorrect
  2. BIt determines the bank's daily target for reserve balances at the central bank
  3. CIt replaces the need for liquidity stress testing by prescribing a single severe scenario
  4. DIt sets the interest rate at which the bank prices all retail deposits in normal conditions

Explanation

A CFP is a crisis-response framework that identifies backup funding sources, escalation procedures, and roles when normal funding is impaired. It complements rather than replaces stress testing, and it is not a tool for daily reserve targeting or deposit pricing.

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