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

In a liquidity stress test, a bank assumes that during stress its corporate customers will draw down committed revolving facilities. Which factor most justifies assuming a HIGHER drawdown rate on a given facility?

A higher drawdown rate is justified when the borrower is losing capital market access and its credit quality is weakening, because such borrowers lean on committed lines as substitute funding exactly when the bank is under stress. Fees, maturity, or deposit balances do not signal that need.

  1. AThe borrower is losing access to capital markets and its credit quality is deterioratingCorrect
  2. BThe facility is undrawn and has a long remaining maturity
  3. CThe borrower holds large operating deposits at the bank
  4. DThe facility is priced with a commitment fee

Explanation

Borrowers who lose market access or face credit deterioration rely on committed lines and draw heavily, often precisely when the bank is stressed. The other features do not signal greater drawdown need.

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