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FRM Part II · FRM Exam Part II · Liquidity Stress Testing

A risk manager is calibrating the horizon for a liquidity stress scenario for a bank reliant on wholesale funding. Which approach is most appropriate?

Multiple horizons, from overnight through weeks to several months, are most appropriate. Liquidity stress evolves over time with different outflow drivers at each stage, so using several horizons shows when the buffer is exhausted. A single overnight or one-year horizon would miss critical timing of shortfalls.

  1. AUse a single overnight horizon because liquidity problems resolve within one day
  2. BUse multiple horizons, such as overnight, one week, one month and three months or longer, to capture evolving outflow dynamicsCorrect
  3. CUse only a one-year horizon to align with the capital planning cycle
  4. DUse a horizon equal to the average maturity of the bank's assets

Explanation

Liquidity stress unfolds over different time frames: immediate intraday and overnight needs, then short-term funding runoff, then longer structural pressure. Multiple horizons reveal when the survival period ends. A single horizon, even a long one, hides the timing of shortfalls.

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