Liquidity Risk Management Flashcards

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

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

Market liquidity risk is the risk that selling a position will move the market against you—bid-ask spreads widen and depth disappears in stress.

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

Answer: 100%

The Basel III LCR standard requires internationally active banks to maintain a minimum LCR of 100% at all times under the fully phased-in framework.

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

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

Short-term wholesale funding is highly confidence-sensitive; institutions like Lehman Brothers lost access overnight when market confidence evaporated in 2008.

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

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

Survival horizon is the time a firm can sustain operations relying solely on its liquidity buffer under a stress scenario without new external funding.

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

Answer: Discount window lending and standing repo facilities

Central banks act as lenders of last resort through facilities like the Federal Reserve's discount window, providing collateralized loans to solvent but illiquid institutions.

Transfer pricing for liquidity in a bank means:

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

Funds transfer pricing allocates liquidity costs to business units, incentivizing them to favor stable funding and liquid assets that reduce the firm's liquidity risk.