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

Which asset is generally the best candidate for inclusion in a bank's core liquidity buffer used for stress testing?

Unencumbered central bank reserves and high-quality, central-bank-eligible government securities are the best buffer candidates because they can be converted to cash quickly with small haircuts even in stress. Pledged, illiquid or related-party assets are unreliable sources of liquidity.

  1. AUnencumbered central bank reserves and high-quality government securities that are central-bank eligibleCorrect
  2. BLoans to related entities that are due within 30 days
  3. CA portfolio of illiquid private equity stakes valued at fair value
  4. DReceivables pledged as collateral for existing repo funding

Explanation

Buffer assets must be unencumbered, readily monetisable and reliable in stress. Central bank reserves and eligible high-quality government securities meet this. Illiquid equity, pledged receivables and related-party loans do not.

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