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

Which of the following is correctly classified as liquidity risk, rather than market risk, in a bank?

The inability to meet withdrawal demands on time without selling assets at heavy discounts is liquidity risk. It concerns failure to fund obligations when due. Losses from share price, exchange rate or yield movements are changes in position values and therefore fall under market risk.

  1. ALoss in value of the bank's equity holdings due to a fall in share prices
  2. BLoss on an open foreign currency position after the rupee depreciates
  3. CInability to meet withdrawal demands on time without selling assets at heavy discountsCorrect
  4. DFall in bond portfolio value after a rise in benchmark yields

Explanation

Liquidity risk is the risk of being unable to meet payment obligations as they fall due, or only doing so at excessive cost. The other three options are changes in the value of positions caused by movements in equity prices, exchange rates and yields, which are market risk.

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