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FRM Part II · FRM Exam Part II · Liquidity and Reserves Management: Strategies and Policies

Which consideration is most important when a bank counts central bank reserve balances and government securities as part of its liquidity buffer for a stress period?

Buffer assets must be unencumbered and operationally accessible so they can be sold or pledged for cash when stress hits. Yield, trading-book booking, or long maturity do not determine whether an asset can actually be monetized quickly.

  1. AThe assets must be unencumbered and operationally accessible so they can be monetized when neededCorrect
  2. BThe assets must carry the highest accounting yield in the portfolio
  3. CThe assets must be held in the trading book to be marked daily
  4. DThe assets must have a maturity longer than the bank's longest liability

Explanation

A buffer is only useful if assets are free of pledges and can actually be sold or repoed on short notice, including operationally. Yield, trading-book classification and long maturity do not make an asset usable in stress.

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