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FRM Part II · FRM Exam Part II · Liquidity Risk Reporting and Stress Testing

Which practice is most consistent with BCBS 144 expectations on how a bank should use liquidity monitoring metrics across currencies and legal entities?

A bank should monitor liquidity by significant currency and legal entity as well as on a consolidated basis, because liquidity may not move freely between entities or currencies. Consolidated-only monitoring can hide local shortfalls caused by transfer restrictions or market closures.

  1. AMonitor only the consolidated position since liquidity is fully fungible
  2. BMonitor liquidity positions by significant currency and legal entity, recognizing transfer restrictionsCorrect
  3. CMonitor only the domestic currency because foreign currency is covered by the central bank
  4. DMonitor only the parent bank because subsidiaries are self-funding

Explanation

Liquidity may not be freely transferable across entities or currencies, so banks should monitor by significant currency and legal entity and assess transfer constraints. Consolidated-only views can hide local shortfalls.

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