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 LCR requires banks to hold sufficient HQLA to cover net cash outflows over a 30-day stress scenario, with a minimum ratio of 100%.

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

The NSFR requires banks to maintain sufficient stable funding to support their assets over a one-year horizon, addressing structural liquidity risk.

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

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.

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

Funding liquidity risk is the risk of being unable to fund liabilities or meet cash obligations, which can cause insolvency even for solvent institutions.

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

Liquidity stress tests model scenarios where market funding dries up and depositors withdraw funds simultaneously to assess survival time and liquidity buffer adequacy.

Financial Risk Management Practice Test

Financial Risk Management Practice Test

Financial Risk Management Liquidity Risk Management