FRM Part II · FRM Exam Part II · Monitoring Liquidity
A treasurer monitors a bank's cumulative liquidity gap. Net cash flows by bucket are: overnight +30, 2-7 days -50, 8-30 days -40 (USD million). The bank holds an unencumbered liquid buffer of USD 45 million. What does the cumulative gap monitoring indicate?
The cumulative gap at day 30 is minus USD 60 million (30 minus 50 minus 40), which exceeds the USD 45 million buffer by USD 15 million. The bank would face a shortfall unless it raises funds or adds liquidity.
- AThe buffer covers the cumulative gap through day 30
- BCumulative gap is -60 at day 30, exceeding the buffer by 15Correct
- CCumulative gap is -90 at day 30, exceeding the buffer by 45
- DThe cumulative gap is positive because overnight is positive
Explanation
Cumulative: +30, then 30-50 = -20, then -20-40 = -60 at day 30. The buffer of 45 leaves a 15 shortfall. Ignoring the overnight inflow gives -90, which is a mistake of omitting the first bucket.
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