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FRM Part II · FRM Exam Part II · Liquidity Risk Management

Which of the following is the most appropriate reason a bank should periodically test its access to contingency funding sources, such as small repo or discount window transactions?

Banks test contingency funding access to prove operational readiness: that facilities, counterparties, documentation and collateral mobilization work in practice and in time. Testing does not boost margins, replace early warning indicators, or lower regulatory liquidity ratios.

  1. ATo demonstrate operational readiness and confirm that counterparties and facilities function and that collateral can be mobilized in timeCorrect
  2. BTo increase reported net interest margin through additional borrowing
  3. CTo eliminate the need for early warning indicators
  4. DTo ensure the bank's liquidity coverage ratio is reduced

Explanation

Testing confirms that legal documentation, operational processes, collateral transfer and counterparty relationships work when needed, and it reduces stigma and surprises. It does not replace early warning indicators, boost margin, or aim to reduce regulatory ratios.

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