Financial Risk Management Liquidity Risk Management 3

Question 1

Market liquidity risk differs from funding liquidity risk in that it relates to:

Accepted Answer

The risk of being unable to sell or unwind a position without significantly affecting its market price

Answer

The risk of being unable to roll over short-term liabilities at maturity

Answer

The risk of counterparty default on a repo agreement

Answer

Interest rate risk arising from the mismatch in asset and liability durations

Question 2

Under Basel III, the minimum LCR requirement for internationally active banks is:

Accepted Answer

100%

Answer

80%

Answer

90%

Answer

120%

Question 3

A bank that relies heavily on short-term wholesale funding faces elevated liquidity risk because:

Accepted Answer

Short-term wholesale funding can evaporate quickly during market stress as investors choose not to roll

Answer

Wholesale counterparties charge higher interest rates than retail depositors

Answer

Regulatory rules cap the total amount of wholesale funding at 50% of liabilities

Answer

Short-term funding increases duration mismatch and raises interest rate risk

Question 4

What is the 'survival horizon' in liquidity risk management?

Accepted Answer

The length of time a firm can survive without access to external funding using only its liquid assets

Answer

The maximum period over which interest rate risk is measured for ALM purposes

Answer

The minimum holding period for HQLA before they qualify for LCR credit

Answer

The period over which credit losses are expected to peak in an economic downturn

Question 5

Which instrument is commonly used by central banks to provide emergency liquidity to commercial banks?

Accepted Answer

Discount window lending and standing repo facilities

Answer

Credit default swaps acquired from the interbank market

Answer

Interbank fed funds overnight loans from other commercial banks

Answer

Subordinated debt issuance underwritten by the central bank

Question 6

Transfer pricing for liquidity in a bank means:

Accepted Answer

Charging business units for the cost of liquidity they consume and crediting those that provide stable funding

Answer

Pricing loans to clients based on their internal credit rating plus a liquidity spread

Answer

The internal mechanism by which the treasury recharges branches for overnight funding costs

Answer

Pricing interbank deposits to reflect the bank's funding cost plus a margin