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 the Liquidity Coverage Ratio (LCR) under Basel III?
Answer: The ratio of high-quality liquid assets to net cash outflows over a 30-day stress period
The LCR requires banks to hold sufficient HQLA to cover net cash outflows over a 30-day stress scenario, with a minimum ratio of 100%.
The Net Stable Funding Ratio (NSFR) is designed to:
Answer: Promote stable medium- and long-term funding relative to asset liquidity needs
The NSFR requires banks to maintain sufficient stable funding to support their assets over a one-year horizon, addressing structural liquidity risk.
What are High-Quality Liquid Assets (HQLA) in the LCR framework?
Answer: Assets that can be easily converted into cash with little or no loss of value in stress conditions
HQLA must be liquid in markets even during stress, unencumbered, and easily convertible to cash; they include central bank reserves, government bonds, and certain corporate bonds.
Funding liquidity risk refers to:
Answer: The risk that a firm cannot meet its financial obligations as they come due without incurring unacceptable losses
Funding liquidity risk is the risk of being unable to fund liabilities or meet cash obligations, which can cause insolvency even for solvent institutions.
A liquidity stress test typically evaluates a bank's ability to survive:
Answer: A scenario where deposit outflows and funding markets freeze simultaneously
Liquidity stress tests model scenarios where market funding dries up and depositors withdraw funds simultaneously to assess survival time and liquidity buffer adequacy.
What is a 'liquidity buffer' maintained by banks?
Answer: A reserve of liquid assets readily available to cover unexpected cash outflows
A liquidity buffer is a pool of unencumbered HQLA that can be monetized quickly to fund unexpected outflows during stress.
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