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

Which feature best makes an asset suitable for inclusion in a stress-based liquidity buffer?

An asset suits the buffer when it is unencumbered and can be monetized quickly with a low haircut in stressed markets, including through central bank facilities. Yield, concentration, or liquidity trapped in a restricted subsidiary does not support the bank's stress needs.

  1. AHigh yield relative to similar-maturity government securities
  2. BBeing unencumbered and readily monetizable with low haircut in stressed markets, including via central bank facilitiesCorrect
  3. CBeing concentrated in a single issuer to simplify operations
  4. DHolding it in a subsidiary that is legally restricted from transferring funds to the parent

Explanation

Buffer assets must be available and convertible to cash quickly with limited loss in stress. Unencumbered, high-quality, liquid assets meet this. High yield implies more risk, concentration adds risk, and trapped liquidity in a subsidiary cannot support the group.

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