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

Which practice best reflects sound governance of a bank's liquidity policy?

The board should approve the liquidity policy and risk tolerance, and the policy should be reviewed periodically and after material changes in business or market conditions. Independent oversight and formal escalation of exceptions are also part of sound governance.

  1. AManagement alone reviews the policy once when the bank is established
  2. BThe board approves the policy and risk tolerance, and the policy is reviewed periodically and after material changes in business or market conditionsCorrect
  3. CLimits are set by the front office without independent oversight
  4. DPolicy exceptions are handled informally without escalation

Explanation

Sound governance requires board approval of the policy and tolerance, periodic review and updates when conditions or strategy change, independent oversight of limits, and formal escalation of breaches. The other options omit these controls.

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