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

The process of selling non-performing loans to reduce balance sheet risk

Answer

Allocating capital between credit, market, and operational risk

Answer

The daily reconciliation of trading book positions with settlement accounts

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

Market liquidity risk from inability to sell assets at fair value

Answer

Intraday liquidity risk from payment system disruptions

Answer

Contingent liquidity risk from drawdown of off-balance-sheet commitments

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

Collateral that has declined in credit rating below investment grade

Answer

Securities that are subject to lock-up periods preventing immediate sale

Answer

Repos that have not yet been included in the LCR calculation

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

Daily fluctuations in the LCR ratio caused by market price movements

Answer

Risk from overnight repo markets refusing to roll over funding each morning

Answer

The risk that intraday trading losses exceed the firm's daily VaR limit

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

Rising interest rates increasing the duration of the bond portfolio

Answer

Short selling activity by hedge fund clients

Answer

Regulatory requirements to hold more capital

Question 6

What is a 'Contingency Funding Plan' (CFP) in liquidity risk management?

Accepted Answer

A documented plan identifying alternative funding sources and escalation procedures for liquidity stress events

Answer

A plan to raise additional regulatory capital during periods of financial stress

Answer

The bank's annual strategy for diversifying its wholesale funding mix

Answer

A federal requirement for banks to maintain FDIC-insured deposits above $250,000