Liquidity Risk Management Flashcards

What is liquidity risk primarily concerned with?

Answer: The risk that an organization cannot meet its financial obligations as they come due without incurring unacceptable losses

Liquidity risk is the risk that an organization cannot meet its financial obligations as they come due without incurring unacceptable losses or disrupting normal business operations.

Which of the following BEST describes funding liquidity risk?

Answer: The risk that an institution cannot raise sufficient funds to meet its obligations

Funding liquidity risk refers to the risk that an institution cannot obtain sufficient funds—through asset liquidation, borrowing, or capital issuance—to meet its obligations.

What is a 'liquidity buffer' in risk management?

Answer: A reserve of liquid assets held to cover unexpected cash outflows

A liquidity buffer is a reserve of high-quality liquid assets that can be quickly converted to cash to cover unexpected cash outflows during a stress period.

Which metric measures the proportion of highly liquid assets to net cash outflows over a 30-day stress period?

Answer: Liquidity Coverage Ratio (LCR)

The Liquidity Coverage Ratio (LCR) requires banks to hold enough High Quality Liquid Assets (HQLA) to cover total net cash outflows over a 30-day stress scenario.

Market liquidity risk is BEST described as:

Answer: The risk that an asset cannot be sold quickly without significantly impacting its price

Market liquidity risk is the risk that an asset cannot be sold or liquidated quickly enough in the market without causing a significant adverse movement in its price.

What is a 'liquidity stress test' designed to do?

Answer: Assess an institution's ability to withstand severe but plausible liquidity disruptions

Liquidity stress tests assess whether an institution can survive severe but plausible scenarios—such as sudden withdrawal of funding or market disruption—over a specified time horizon.

Which of the following is classified as a High-Quality Liquid Asset (HQLA) under Basel III?

Answer: Government securities issued by sovereign entities with low default risk

Under Basel III, Level 1 HQLA includes government securities, central bank reserves, and other sovereign bonds with extremely low credit and liquidity risk.