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FRM Part II · FRM Exam Part II · Liquidity and Leverage

Which of the following is the best example of a contingent liquidity risk source for a bank, as opposed to a source that arises from ordinary balance sheet maturities?

Drawdown of committed credit lines during stress is the contingent source. Its timing and size depend on client behavior and market events, whereas term loan repayments, deposit maturities and coupons are contractual outflows that can be scheduled in advance.

  1. AScheduled repayment of a five-year term loan from the bank's own debt issuance
  2. BDrawdown of committed credit lines by corporate clients during a market stressCorrect
  3. CMaturity of a certificate of deposit on its stated date
  4. DCoupon payments on outstanding senior bonds

Explanation

Contingent liquidity needs depend on events or client decisions, such as drawdowns of committed facilities, which tend to spike in stress. The other options are contractual cash flows with known dates and amounts.

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