Skip to content

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

When a bank estimates its survival horizon, which treatment of the liquid asset buffer is most appropriate?

The buffer should include only unencumbered assets valued at stressed market prices after haircuts, taking account of operational and time-to-monetize constraints. Using book or pre-stress values overstates resources, while counting only cash ignores genuinely marketable assets, so neither gives a realistic survival horizon.

  1. AInclude all securities at book value regardless of encumbrance
  2. BInclude only cash, ignoring all securities
  3. CInclude unencumbered assets at stressed market values after haircuts, considering operational and time-to-monetize constraintsCorrect
  4. DInclude assets at their pre-stress market value to avoid procyclical results

Explanation

Counterbalancing capacity should reflect what can actually be monetized under stress: unencumbered assets, valued with stressed prices and haircuts, and subject to operational and timing limits. Book value and pre-stress values overstate resources; excluding all securities is overly conservative and ignores the purpose of a buffer.

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