CRA Liquidity Risk Management 3

Question 1

Liquidity transfer pricing (LTP) is used by banks primarily to:

Accepted Answer

Allocate the cost and benefit of liquidity to individual business lines, incentivizing behavior consistent with firm-wide liquidity risk appetite

Answer

LTP ensures that business lines consuming or generating liquidity are charged or credited appropriately, aligning their incentives with the firm's overall liquidity risk management.

Question 2

Early warning indicators (EWIs) for emerging liquidity risk typically include:

Accepted Answer

Rising interbank funding costs, increased reliance on central bank facilities, and accelerating retail deposit outflows

Answer

EWIs such as widening funding spreads, central bank borrowing, and deposit outflows signal building liquidity stress before it becomes severe.

Question 3

A liquidity gap analysis is used to:

Accepted Answer

Identify mismatches between projected cash inflows and outflows across maturity time buckets

Answer

Liquidity gap analysis maps projected cash flows into time buckets to identify periods where outflows exceed inflows, revealing structural funding gaps.

Question 4

Encumbrance risk in liquidity management refers to:

Accepted Answer

The risk that pledged collateral reduces the pool of unencumbered assets available to monetize in a stress scenario

Answer

Over-encumbrance leaves fewer freely available unencumbered assets to liquidate during stress, materially reducing the effective liquidity buffer.

Question 5

In a secured funding transaction, the haircut applied to collateral primarily serves to:

Accepted Answer

Protect the cash lender by ensuring collateral value exceeds the loan amount, providing a buffer against price declines

Answer

Haircuts protect secured lenders by requiring over-collateralization, ensuring that even if collateral values fall the lender is still covered.

(CRA) Certified Risk Analyst Practice Test

(CRA) Certified Risk Analyst Practice Test

CRA Liquidity Risk Management 3