CRO Liquidity Risk Management 1 ā Questions and Answers
Question 1: What is liquidity risk primarily concerned with?
- The risk that an organization cannot meet its financial obligations as they come due without incurring unacceptable losses (Correct answer)
- The risk of loss due to changes in interest rates
- The risk of counterparty default on a financial contract
- The risk of market price fluctuations affecting asset values
Correct 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.
Question 2: Which of the following BEST describes funding liquidity risk?
- The risk that market prices will fall, making assets harder to sell
- The risk that an institution cannot raise sufficient funds to meet its obligations (Correct answer)
- The risk of operational failures causing payment delays
- The risk that regulatory requirements will increase funding costs
Correct 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 fundsāthrough asset liquidation, borrowing, or capital issuanceāto meet its obligations.
Question 3: What is a 'liquidity buffer' in risk management?
- A reserve of liquid assets held to cover unexpected cash outflows (Correct answer)
- A time delay built into payment processing systems
- The difference between current assets and current liabilities
- A regulatory capital surcharge applied to illiquid assets
Correct 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.
Question 4: Which metric measures the proportion of highly liquid assets to net cash outflows over a 30-day stress period?
- Net Stable Funding Ratio (NSFR)
- Liquidity Coverage Ratio (LCR) (Correct answer)
- Current Ratio
- Quick Ratio
Correct 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.
Question 5: Market liquidity risk is BEST described as:
- The risk that an institution's credit rating is downgraded by agencies
- The risk that an asset cannot be sold quickly without significantly impacting its price (Correct answer)
- The risk of insufficient cash flows from daily operations
- The risk of regulatory penalties for insufficient reserves
Correct 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.
Question 6: What is a 'liquidity stress test' designed to do?
- Test employees' knowledge of liquidity regulations
- Assess an institution's ability to withstand severe but plausible liquidity disruptions (Correct answer)
- Calculate the minimum regulatory capital requirement
- Evaluate the credit quality of the institution's loan portfolio
Correct 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 scenariosāsuch as sudden withdrawal of funding or market disruptionāover a specified time horizon.
Question 7: Which of the following is classified as a High-Quality Liquid Asset (HQLA) under Basel III?
- Corporate bonds rated BBB by major credit agencies
- Real estate properties held for investment
- Government securities issued by sovereign entities with low default risk (Correct answer)
- Equity shares in publicly listed companies
Correct 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.
CRO Liquidity Risk Management 1
What is liquidity risk primarily concerned with?