CRO Liquidity Risk Management 2 — Questions and Answers
Question 1: The Net Stable Funding Ratio (NSFR) requires that:
- Available stable funding exceeds required stable funding over a 1-year horizon (Correct answer)
- Liquid assets exceed liabilities over a 30-day period
- Short-term borrowings do not exceed 25% of total funding
- The current ratio remains above 1.5 at all times
Correct answer: Available stable funding exceeds required stable funding over a 1-year horizon
The NSFR requires that Available Stable Funding (ASF) exceeds Required Stable Funding (RSF) over a one-year horizon, promoting durable long-term funding structures.
Question 2: A 'cash flow gap' analysis in liquidity management measures:
- The difference between operating income and net income
- The mismatch between cash inflows and outflows across time buckets (Correct answer)
- The gap between planned and actual capital expenditures
- The difference between regulatory and economic capital requirements
Correct answer: The mismatch between cash inflows and outflows across time buckets
Cash flow gap analysis identifies the mismatch between expected cash inflows and outflows across different time buckets, highlighting periods of potential liquidity shortfall.
Question 3: Which of the following BEST describes 'contingent liquidity risk'?
- Liquidity risk arising from contractually committed but undrawn credit lines (Correct answer)
- Liquidity risk that has already materialized and caused a cash shortfall
- Liquidity risk from a specific business unit's operations
- Liquidity risk arising solely from foreign currency transactions
Correct answer: Liquidity risk arising from contractually committed but undrawn credit lines
Contingent liquidity risk arises from obligations that may not materialize under normal conditions but could trigger significant cash outflows under stress, such as undrawn credit facilities or financial guarantees.
Question 4: What is the primary purpose of an institution's Contingency Funding Plan (CFP)?
- To plan for organic growth of the loan portfolio
- To provide a documented strategy for managing severe liquidity stress events (Correct answer)
- To establish daily cash management procedures for normal operations
- To comply with anti-money laundering regulations
Correct answer: To provide a documented strategy for managing severe liquidity stress events
A Contingency Funding Plan (CFP) outlines pre-established strategies, procedures, and responsibilities for managing severe liquidity stress situations, including identifying backup funding sources.
Question 5: When calculating the Liquidity Coverage Ratio (LCR), which of the following represents a cash OUTFLOW?
- Receipt of principal on maturing government bonds
- Run-off of retail deposits under stress assumptions (Correct answer)
- Collateral posted by counterparties to the institution
- Central bank lending facility drawdowns by the institution
Correct answer: Run-off of retail deposits under stress assumptions
Under LCR calculations, retail deposit run-offs are modeled as cash outflows, with regulatory run-off rates applied to different deposit categories based on their stability characteristics.
Question 6: What is 'intraday liquidity risk'?
- Risk that daily trading activities cause losses exceeding a single day's revenue
- Risk of being unable to meet payment and settlement obligations during the business day (Correct answer)
- Risk from liquidity shortfalls that resolve within 24 hours automatically
- Risk from overnight interest rate changes affecting short-term borrowings
Correct answer: Risk of being unable to meet payment and settlement obligations during the business day
Intraday liquidity risk refers to the risk that an institution cannot meet its payment and settlement obligations during the business day, potentially disrupting payment systems and financial markets.
Question 7: Which of the following funding sources is MOST stable for liquidity management purposes?
- Wholesale funding from money market funds
- Secured repo funding with short-term maturities
- Retail deposits with established customer relationships (Correct answer)
- Commercial paper programs with rolling maturities
Correct answer: Retail deposits with established customer relationships
Retail deposits with established customer relationships are considered the most stable funding source because they have historically shown low run-off rates even during stress scenarios.
CRO Liquidity Risk Management 2
The Net Stable Funding Ratio (NSFR) requires that: