Financial Risk Management Liquidity Risk Management

Question 1

What is the Liquidity Coverage Ratio (LCR) under Basel III?

Accepted Answer

The ratio of high-quality liquid assets to net cash outflows over a 30-day stress period

Answer

The ratio of long-term stable funding to long-term assets

Answer

The minimum percentage of deposits that must be held as cash reserves

Answer

The ratio of liquid assets to total liabilities required for FDIC insurance

Question 2

The Net Stable Funding Ratio (NSFR) is designed to:

Accepted Answer

Promote stable medium- and long-term funding relative to asset liquidity needs

Answer

Ensure banks can survive a 30-day acute liquidity stress event

Answer

Limit the use of short-term wholesale funding for trading book activities

Answer

Set the minimum reserve ratio for commercial bank deposits

Question 3

What are High-Quality Liquid Assets (HQLA) in the LCR framework?

Accepted Answer

Assets that can be easily converted into cash with little or no loss of value in stress conditions

Answer

Mortgage-backed securities rated AA or above by credit agencies

Answer

All assets with a remaining maturity of 30 days or less

Answer

Cash and deposits held at the Federal Reserve only

Question 4

Funding liquidity risk refers to:

Accepted Answer

The risk that a firm cannot meet its financial obligations as they come due without incurring unacceptable losses

Answer

The risk that a firm cannot sell assets quickly without significant price discount

Answer

The risk that interest rates rise, increasing the cost of new borrowing

Answer

Market-wide dislocation that prevents normal secondary market trading

Question 5

A liquidity stress test typically evaluates a bank's ability to survive:

Accepted Answer

A scenario where deposit outflows and funding markets freeze simultaneously

Answer

An interest rate increase of 200 basis points over 12 months

Answer

A 20% decline in equity prices over a 5-day trading period

Answer

A credit rating downgrade of its loan portfolio by two notches

Question 6

What is a 'liquidity buffer' maintained by banks?

Accepted Answer

A reserve of liquid assets readily available to cover unexpected cash outflows

Answer

Excess capital held above the regulatory minimum to absorb unexpected losses

Answer

The difference between a bank's bid and ask price for its own debt securities

Answer

The portion of loan commitments not yet drawn by borrowers