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
What is the primary purpose of the Liquidity Coverage Ratio (LCR) under Basel III?
Answer: To ensure banks hold sufficient high-quality liquid assets to survive a 30-day stress scenario
The LCR requires banks to maintain enough HQLA to cover net cash outflows over a 30-day stressed liquidity scenario.
Which of the following best describes funding liquidity risk?
Answer: The risk that a firm cannot meet its cash obligations as they come due without incurring unacceptable losses
Funding liquidity risk is the inability to meet cash payment obligations when due without incurring excessive cost or material losses.
The Net Stable Funding Ratio (NSFR) was introduced under Basel III primarily to:
Answer: Promote stable medium- and long-term funding structures over a one-year horizon
The NSFR requires banks to maintain a stable funding profile over a one-year horizon, reducing reliance on volatile short-term wholesale funding.
During a liquidity stress event, which action is most likely to amplify systemic risk across the financial system?
Answer: Selling illiquid assets at fire-sale prices to generate immediate cash
Fire-sale disposals depress market prices and create feedback loops that spread stress to other institutions holding similar assets.
A bank's liquidity buffer is best described as:
Answer: A reserve of unencumbered liquid assets held to cover unexpected cash outflows under stress
A liquidity buffer consists of unencumbered HQLA that can be readily monetized to meet unexpected outflows without market access.
Which of the following is an example of market liquidity risk rather than funding liquidity risk?
Answer: An inability to sell a large position in a thinly traded bond without significantly moving the market price
Market liquidity risk arises when a large position cannot be liquidated without materially impacting its market price due to insufficient market depth.
Under Basel III, Level 1 High-Quality Liquid Assets (HQLA) are best characterized by which of the following?
Answer: They include cash, central bank reserves, and qualifying sovereign securities with 0% risk weight and no haircut
Level 1 assets include cash, central bank reserves, and qualifying sovereign/central bank securities with 0% risk weight, and carry no haircut or buffer cap.