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CMA Final · Risk Management in Banking and Insurance · Introduction to Risk Management

Which of the following best describes liquidity risk in a bank, as distinguished from market risk?

Liquidity risk is the risk that a bank cannot meet its payment obligations when they fall due, or can do so only at excessive cost, because it cannot raise funds or sell assets readily. Market risk concerns price movements, credit risk concerns defaults, and operational risk concerns process or system failures.

  1. AThe possible loss from adverse movements in interest rates, exchange rates or equity prices on trading positions
  2. BThe possible loss from a borrower failing to repay principal or interest when due
  3. CThe risk that the bank cannot meet its payment obligations as they fall due, or can do so only at an excessive cost, because it cannot raise funds or sell assets readilyCorrect
  4. DThe possible loss from inadequate internal processes, people, systems or external events

Explanation

Liquidity risk is the inability to meet obligations when due without unacceptable losses, through funding liquidity or market liquidity problems. The first option defines market risk, the second credit risk and the fourth operational risk. Only the third matches liquidity risk.

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