Financial Risk Management Liquidity Risk Management 2

Question 1

What is 'asset-liability management' (ALM) in the context of bank liquidity risk?

Accepted Answer

Managing the maturity and cash flow mismatches between a bank's assets and liabilities

Answer

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.

Question 2

A 'run on the bank' represents which type of liquidity risk?

Accepted Answer

Funding liquidity risk from sudden mass withdrawal of deposits

Answer

A bank run occurs when depositors simultaneously withdraw funds due to loss of confidence, creating a severe funding liquidity crisis.

Question 3

What does 'encumbered' mean when describing collateral in liquidity management?

Accepted Answer

Assets that are pledged or otherwise unavailable for use in meeting liquidity needs

Answer

Encumbered assets are pledged as collateral or otherwise legally committed, making them unavailable for the bank to use as a liquidity buffer.

Question 4

Intraday liquidity risk refers to:

Accepted Answer

The risk of running out of liquidity within a single business day due to payment timing mismatches

Answer

Intraday liquidity risk arises when payment outflows occur before incoming payments are received, creating short-term funding gaps that can disrupt settlement.

Question 5

Which of the following is a primary source of contingent liquidity risk for banks?

Accepted Answer

Undrawn credit lines and letters of credit that clients may draw upon in stress

Answer

Undrawn commitments represent contingent off-balance-sheet obligations that could create sudden large cash outflows if borrowers draw them during market stress.

Financial Risk Management Practice Test

Financial Risk Management Practice Test

Financial Risk Management Liquidity Risk Management 2