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

Which practice best reflects the use of liquidity risk limits within a policy framework?

Good practice is to set limits in advance on metrics like cumulative funding gaps and funding concentration, and to escalate any breach to senior management. Reactive, uniform or absent limits fail to control liquidity risk appropriately.

  1. ASetting limits only after a liquidity event occurs
  2. BSetting limits on metrics such as cumulative funding gaps and concentration, with breaches escalated to senior managementCorrect
  3. CSetting a single limit applied identically to all business lines regardless of size
  4. DAvoiding limits so management retains flexibility

Explanation

Effective limits are set in advance on relevant metrics such as maturity gaps and funding concentration, with defined escalation on breach. Setting them after an event is reactive, uniform limits ignore differing risk, and no limits remove control.

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