Liquidity Risk Management Flashcards
6 cards from real Financial Risk Management practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 6 Liquidity Risk Management flashcards as text
What is 'asset-liability management' (ALM) in the context of bank liquidity risk?
Answer: Managing the maturity and cash flow mismatches between a bank's assets and liabilities
ALM focuses on managing interest rate risk and liquidity risk arising from differences in the timing of cash inflows from assets and outflows on liabilities.
A 'run on the bank' represents which type of liquidity risk?
Answer: Funding liquidity risk from sudden mass withdrawal of deposits
A bank run occurs when depositors simultaneously withdraw funds due to loss of confidence, creating a severe funding liquidity crisis.
What does 'encumbered' mean when describing collateral in liquidity management?
Answer: Assets that are pledged or otherwise unavailable for use in meeting liquidity needs
Encumbered assets are pledged as collateral or otherwise legally committed, making them unavailable for the bank to use as a liquidity buffer.
Intraday liquidity risk refers to:
Answer: The risk of running out of liquidity within a single business day due to payment timing mismatches
Intraday liquidity risk arises when payment outflows occur before incoming payments are received, creating short-term funding gaps that can disrupt settlement.
Which of the following is a primary source of contingent liquidity risk for banks?
Answer: Undrawn credit lines and letters of credit that clients may draw upon in stress
Undrawn commitments represent contingent off-balance-sheet obligations that could create sudden large cash outflows if borrowers draw them during market stress.
What is a 'Contingency Funding Plan' (CFP) in liquidity risk management?
Answer: A documented plan identifying alternative funding sources and escalation procedures for liquidity stress events
A CFP outlines specific actions, funding sources, and decision-making authority to be activated when normal funding access is impaired.
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