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

A risk manager wants the scenario to capture second-round effects. Which feature best illustrates a second-round effect in a liquidity stress scenario?

Fire sales used to meet initial outflows depress market prices, which lowers the value of the remaining liquid assets and further tightens funding. This feedback loop is a second-round effect, unlike static run-off assumptions, listings of commitments, or ratio reporting.

  1. AFire sales of assets to meet outflows depress market prices, reducing the value of remaining liquid assets and further tightening fundingCorrect
  2. BApplying a fixed run-off rate to retail deposits
  3. CListing the bank's committed credit lines
  4. DReporting the liquidity coverage ratio at quarter-end

Explanation

Second-round effects are feedback loops triggered by the initial reaction, such as asset sales depressing prices and reducing the value of remaining liquidity buffers. The other options are static first-round assumptions or reporting items.

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