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FRM Part II · FRM Exam Part II · Liquidity Risk Reporting and Stress Testing

In a combined idiosyncratic and market-wide liquidity stress scenario, which assumption about the bank's counterbalancing capacity is most appropriate?

Counterbalancing capacity should be stressed: haircuts widen, market depth shrinks, and central bank access counts only where collateral eligibility and operational readiness are shown. Assuming pre-stress prices, unchanged secured rollover, or instant monetization of all assets understates the shortfall.

  1. ALiquid assets can be sold at pre-stress prices because the bank's portfolio is high quality
  2. BHaircuts on liquid assets widen and market depth falls, and the central bank facility is assumed available only if eligibility is demonstratedCorrect
  3. CSecured funding rollover rates remain unchanged because collateral backs them
  4. DUnencumbered assets are assumed fully monetizable within one day regardless of type

Explanation

In a market-wide stress, haircuts rise and market depth falls, so monetization values drop. Access to central bank facilities should rely on demonstrated eligibility and operational readiness. The other options assume no stress effect on prices or rollover.

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