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Free Questions › FRM › Liquidity and Treasury Risk Management
Free FRM Liquidity and Treasury Risk Management Practice Questions & Answers
400 exam-style Liquidity and Treasury Risk Management questions. Pick your answer, hit Check answer, and see the worked solution — free to start, no signup.
100% free · No login to startQuestion 31
The 'collateral haircut spiral' occurs when:
Select an option first.
Correct answer: B — Rising haircuts force institutions to sell assets to meet margin calls, depressing prices further, which triggers further haircut increases — a self-reinforcing deleveraging cycle.
Explanation: Haircut spiral (Brunnermeier-Pedersen 2009): price drop → higher haircuts → forced sales → further price drops.
Question 32
Wholesale funding is more volatile than retail deposits because:
Select an option first.
Correct answer: B — Wholesale counterparties are sophisticated and uninsured — they can move large amounts quickly when risk is perceived, with correlated behaviour.
Explanation: Wholesale = uninsured, sophisticated, fast-moving. Retail deposits are stickier due to deposit insurance and inertia.
Question 33
'Available Stable Funding' (ASF) in NSFR includes:
Select an option first.
Correct answer: B — Capital, long-term liabilities, and stable short-term liabilities weighted by their stability over a 1-year horizon.
Explanation: ASF = funding unlikely to be withdrawn over 1 year. Weights: Tier 1 = 100%, stable retail deposits = 95%,
Question 34
'Required Stable Funding' (RSF) in NSFR represents:
Select an option first.
Correct answer: B — The stable funding required based on the liquidity characteristics and residual maturities of assets and off-balance-sheet items.
Explanation: RSF = each asset assigned a factor (0-100%) reflecting funding needed. NSFR ≥ 100% means ASF ≥ RSF.
Question 35
A 'rapid rise in the bank's CDS spread' is best described as:
Select an option first.
Correct answer: B — An early warning indicator of emerging liquidity stress — the market is pricing higher default risk, which can trigger counterparty withdrawals.
Explanation: EWIs of liquidity stress: CDS widening, equity price decline, difficulty rolling overnight funding, rating watch negative.
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Question 36
A high 'secured funding ratio' (most assets pledged) is concerning because:
Select an option first.
Correct answer: B — Most assets are encumbered, leaving few free assets for emergency liquidity generation in a crisis.
Explanation: High encumbrance → low residual HQLA → limited ability to raise additional secured funding in stress.
Question 37
A 'liquidity stress test' differs from standard liquidity analysis in that:
Select an option first.
Correct answer: B — Stress tests apply severe but plausible adverse scenarios to test resilience beyond normal business assumptions.
Explanation: Stress testing goes beyond BAU assumptions to apply shock scenarios and identify vulnerabilities.
Question 38
'Maturity transformation' creates liquidity risk because:
Select an option first.
Correct answer: B — Banks borrow short-term and lend long-term — creating a structural gap where short-term liabilities must be continuously rolled over.
Explanation: Classic banking liquidity risk: the maturity mismatch is the fundamental source of funding liquidity vulnerability.
Question 39
A central bank 'lender of last resort' function backstops banks because:
Select an option first.
Correct answer: B — CBs can create money, providing unlimited liquidity against eligible collateral — preventing self-fulfilling liquidity crises.
Explanation: LOLR (Bagehot): lend freely at penalty rates to solvent institutions against good collateral.
Question 40
The 'liquidity premium' in asset prices represents:
Select an option first.
Correct answer: A — The premium paid for CB emergency facilities.
Explanation: Liquidity premium = compensation for bearing liquidity/illiquidity risk. B is a penalty rate; C is loan pricing; D is a capital charge.
Question 41
In banking, a 'liquidity trap' means:
Select an option first.
Correct answer: A — A situation where banks hoard liquidity (cash/HQLA) rather than lending, reducing effectiveness of monetary policy.
Explanation: Banking liquidity trap: banks accumulate excess reserves instead of lending, making QE less effective as in 2009.
Question 42
A 'fire sale' in liquidity risk means:
Select an option first.
Correct answer: B — Forced rapid asset sales depress market prices, which may trigger further forced selling by other holders — a systemic amplification mechanism.
Explanation: Fire sale: forced selling → price depression → further forced selling → systemic amplification.
Question 43
The 'dual liquidity stress' at a bank means:
Select an option first.
Correct answer: B — Simultaneous funding stress (depositors withdrawing) AND asset price decline (collateral value falling), with each amplifying the other.
Explanation: Compounded stress: liability side (run) + asset side (collateral falls, fire sale losses) hit simultaneously.
Question 44
A bank has HQLA of €8bn and net cash outflows of €10bn over 30 days. Its LCR is:
Select an option first.
Correct answer: A — 80% — below the regulatory minimum.
Explanation: LCR = 8/10 = 80% < 100% minimum. Bank is non-compliant and needs to build HQLA or reduce outflows.
Question 45
A bank's survival horizon is 22 days against a required 30-day minimum. The most appropriate action is:
Select an option first.
Correct answer: A — Build additional HQLA, extend funding maturities, or reduce contingent outflows to close the 8-day gap.
Explanation: Pre-emptive action: build HQLA, extend liability maturities, or reduce committed facility exposure.
Question 46
A bank holds €500m of HQLA but €200m is pledged as repo collateral. Unencumbered HQLA is:
Select an option first.
Correct answer: B — €300m
Explanation: Unencumbered HQLA = Total HQLA − Encumbered = €500m − €200m = €300m. Only unencumbered HQLA counts in LCR numerator.
Question 47
Under NSFR, a 3-year corporate loan with 65% RSF factor and EAD of €1bn requires stable funding of:
Select an option first.
Correct answer: B — €650m
Explanation: RSF = 65% × €1bn = €650m. The 65% factor reflects that this illiquid asset needs substantial stable funding.
Question 48
Undrawn committed revolving credit facilities to non-financial corporates receive which LCR run-off treatment?
Select an option first.
Correct answer: B — 5% outflow rate for undrawn amounts.
Explanation: Basel LCR: undrawn non-financial corporate credit facilities receive a 5-10% run-off rate.
Question 49
A bank's 'funding concentration risk' arises when:
Select an option first.
Correct answer: B — A large proportion of funding comes from a single source — loss of that source creates a disproportionately large funding gap.
Explanation: Funding concentration: cliff risk from dependence on a single funder, instrument, or currency.
Question 50
The 'Minimum Liquidation Period' in VaR-based liquidity models adjusts the holding period to account for:
Select an option first.
Correct answer: B — The number of days needed to liquidate a position without significantly moving the market price.
Explanation: For large illiquid positions, VaR holding period = days to sell without material price impact.
Question 51
A bank's loan-to-deposit ratio (LDR) of 120% indicates:
Select an option first.
Correct answer: B — The bank is funding 20% of its loan book from wholesale sources beyond deposits — higher structural funding vulnerability.
Explanation: LDR > 100% = wholesale funding needed beyond deposit base. Higher LDR = more structural funding risk.
Question 52
'Name concentration' in the funding base refers to:
Select an option first.
Correct answer: B — Having a disproportionately large share of funding from a small number of specific counterparties.
Explanation: Name concentration: if 30% of wholesale funding is from one MMF, that funder withdrawing creates a 30% funding cliff.
Question 53
In the three lines of defence, daily HQLA management sits with:
Select an option first.
Correct answer: B — The treasury department (first line), with independent oversight from risk management (second line).
Explanation: Treasury = first line (manages HQLA); Risk Management = second line (independent oversight); Audit = third line.
Question 54
The 'liquidity value' of an asset differs from market value because:
Select an option first.
Correct answer: B — Liquidity value = amount realistically raised under stress = market value minus haircuts and fire-sale discounts.
Explanation: Liquidity value ≤ market value due to haircuts in repo and fire-sale discounts in outright sales.
Question 55
A reverse repo increases/decreases a bank's liquidity by:
Select an option first.
Correct answer: B — Decreases — a reverse repo deploys cash (the bank lends cash against collateral received).
Explanation: Reverse repo = lending cash out. The bank gives cash and receives securities. To raise funding, banks do repo (sell securities / receive cash).
Question 56
The 'cliff effect' in liquidity risk refers to:
Select an option first.
Correct answer: B — Sudden, large discrete jumps in liquidity needs when a threshold is crossed — such as a one-notch downgrade triggering a large collateral posting requirement.
Explanation: Cliff effects: contractual triggers (rating notches, price levels) cause sudden large jumps in outflows — harder to manage than gradual changes.
Question 57
'Demand-side' liquidity risk refers to:
Select an option first.
Correct answer: B — Unexpected increases in obligations or demand for cash — such as unplanned drawdowns, margin calls, or collateral posting requirements.
Explanation: Demand-side = 'pull' risk. Supply-side = inability to raise new funding or sell assets. Both must be managed.
Question 58
A 2-week wholesale deposit in NSFR receives an ASF factor of approximately:
Select an option first.
Correct answer: B — 0%
Explanation: Short-term (
Question 59
A funding gap of −€3bn at a specific maturity horizon means:
Select an option first.
Correct answer: B — €3bn more in maturing liabilities than maturing assets — the bank must find €3bn of new funding or liquidate assets.
Explanation: Negative gap = outflows exceed inflows. Bank must roll over funding, sell assets, or draw on the liquidity buffer.
Question 60
Liquidity-adjusted VaR (LVaR) extends standard VaR by incorporating:
Select an option first.
Correct answer: B — The additional loss from bid-ask spread and market impact when liquidating a stressed position.
Explanation: LVaR = Standard VaR + liquidity cost (spread + market impact). More realistic for illiquid positions.
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