Skip to content

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

In designing a stress scenario, a risk manager wants to reflect that a bank's downgrade will reduce its access to secured funding even when collateral quality is unchanged. Which assumption best captures this effect?

The best assumption is that counterparties raise haircuts and shorten tenors or withdraw lines after the downgrade, shrinking secured funding capacity. Collateralization does not make repo immune to firm-specific stress, so assuming full rollover, constant haircuts or automatic central bank replacement would understate the risk.

  1. AHaircuts on repo collateral are held constant at pre-stress levels
  2. BCounterparties increase haircuts and shorten tenors or withdraw, reducing secured funding capacityCorrect
  3. CSecured funding is assumed to be fully rolled over because it is collateralized
  4. DSecured funding is replaced one-for-one by central bank facilities on day one

Explanation

Under a firm-specific shock, repo counterparties tend to raise haircuts, shorten tenor or cut lines even for good collateral. Assuming full rollover or constant haircuts ignores this channel. Automatic central bank replacement is an unsupported management assumption.

Did you get it right without looking?

One question tells you little. A timed set on Liquidity Risk Reporting and Stress Testing shows your real accuracy, how long you take and where you lose marks.

Practise Liquidity Risk Reporting and Stress TestingFree diagnostic mock

More Liquidity Risk Reporting and Stress Testing questions