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

The LCR requires banks to maintain enough HQLA to cover net cash outflows over a 30-day stressed liquidity scenario.

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

Funding liquidity risk is the inability to meet cash payment obligations when due without incurring excessive cost or material losses.

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

The NSFR requires banks to maintain a stable funding profile over a one-year horizon, reducing reliance on volatile short-term wholesale funding.

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

Fire-sale disposals depress market prices and create feedback loops that spread stress to other institutions holding similar assets.

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

A liquidity buffer consists of unencumbered HQLA that can be readily monetized to meet unexpected outflows without market access.

(CRA) Certified Risk Analyst Practice Test