CRA Liquidity Risk Management

Question 1

What is the primary purpose of the Liquidity Coverage Ratio (LCR) under Basel III?

Accepted Answer

To ensure banks hold sufficient high-quality liquid assets to survive a 30-day stress scenario

Answer

To measure long-term structural funding stability over a one-year horizon

Answer

To limit the concentration of short-term wholesale funding sources

Answer

To quantify credit risk exposure in the trading book

Question 2

Which of the following best describes funding liquidity risk?

Accepted Answer

The risk that a firm cannot meet its cash obligations as they come due without incurring unacceptable losses

Answer

The risk that an asset cannot be sold quickly without a significant price discount

Answer

The risk that rising interest rates reduce the market value of fixed-income assets

Answer

The risk that a counterparty defaults on a contractual payment obligation

Question 3

The Net Stable Funding Ratio (NSFR) was introduced under Basel III primarily to:

Accepted Answer

Promote stable medium- and long-term funding structures over a one-year horizon

Answer

Measure daily intraday payment obligations within the settlement system

Answer

Ensure short-term liquidity adequacy over a 30-day acute stress period

Answer

Limit bank exposure to sovereign debt instruments

Question 4

During a liquidity stress event, which action is most likely to amplify systemic risk across the financial system?

Accepted Answer

Selling illiquid assets at fire-sale prices to generate immediate cash

Answer

Drawing down pre-established committed credit lines

Answer

Activating a pre-approved contingency funding plan

Answer

Pledging additional collateral to access central bank facilities

Question 5

A bank's liquidity buffer is best described as:

Accepted Answer

A reserve of unencumbered liquid assets held to cover unexpected cash outflows under stress

Answer

The maximum amount the bank is authorized to borrow from the central bank overnight

Answer

The difference between the book value of long-term assets and long-term liabilities

Answer

The total collateral currently pledged in outstanding repo agreements

Question 6

Which of the following is an example of market liquidity risk rather than funding liquidity risk?

Accepted Answer

An inability to sell a large position in a thinly traded bond without significantly moving the market price

Answer

A bank's inability to roll over its short-term commercial paper at maturity

Answer

A firm's failure to meet margin calls due to an unexpected cash shortfall

Answer

Increased funding costs resulting from a credit rating downgrade

Question 7

Under Basel III, Level 1 High-Quality Liquid Assets (HQLA) are best characterized by which of the following?

Accepted Answer

They include cash, central bank reserves, and qualifying sovereign securities with 0% risk weight and no haircut

Answer

They carry a 15% haircut and are capped at 40% of the total HQLA buffer

Answer

They are primarily composed of corporate bonds rated AA- or above with a 15% haircut

Answer

They are capped at 60% of the total buffer and include investment-grade covered bonds