Liquidity Risk Management Flashcards
7 cards from real CRA practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Liquidity Risk Management flashcards as text
Intraday liquidity risk refers to:
Answer: The risk of being unable to meet payment obligations during the business day when they fall due
Intraday liquidity risk is the risk that a firm cannot meet time-critical payment obligations during the day, potentially causing payment system gridlock.
Which of the following assets is NOT typically eligible as a High-Quality Liquid Asset (HQLA) under Basel III?
Answer: Investment-grade corporate bonds rated below AA-
Only corporate bonds rated AA- or higher qualify as Level 2B HQLA; bonds rated below AA- do not meet the eligibility threshold.
A Contingency Funding Plan (CFP) is primarily designed to:
Answer: Identify alternative funding sources and specify actions to be taken during a liquidity crisis
A CFP documents the triggers, escalation procedures, funding sources, and actions a bank will deploy in response to a liquidity stress event.
Asset-liability mismatch risk arises primarily when:
Answer: Short-term liabilities are used to fund long-term assets, creating a structural refinancing gap
Asset-liability mismatch occurs when liabilities mature before the assets they fund, exposing the bank to rollover and refinancing risk.
In liquidity risk management, a bank's survival horizon represents:
Answer: The length of time the bank can sustain operations using its liquidity buffer without external market access
The survival horizon measures how long a bank can continue operating in a stress scenario relying solely on its existing liquidity reserves without new funding.
The 'cliff effect' in liquidity risk most commonly refers to:
Answer: A sharp increase in collateral requirements or accelerated debt repayment triggered when credit ratings fall below contractual thresholds
Rating triggers embedded in contracts can cause large, sudden increases in collateral posting or acceleration of debt repayment when ratings breach specified thresholds.
Which of the following best describes the purpose of liquidity stress testing?
Answer: Simulating severe but plausible adverse scenarios to assess whether a firm's liquidity buffers are sufficient
Liquidity stress testing involves constructing institution-specific, market-wide, and combined stress scenarios to evaluate the adequacy of the liquidity buffer.