You’re on a roll
Create a free account to save your FRM progress, track your accuracy by topic, and pick up right where you left off.
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 61
Cross-currency basis risk affects bank liquidity because:
Select an option first.
Correct answer: B — The cost of converting currencies via cross-currency swaps can spike in stress, making foreign-currency-funded assets far more expensive to maintain.
Explanation: Cross-currency basis: during stress the EUR/USD basis widens → European banks paying far more to fund USD assets. This can convert a surplus into a deficit.
Question 62
When a bank's stress test shows LCR falling to 75% in a combined scenario, the appropriate response is:
Select an option first.
Correct answer: B — Pre-emptively build HQLA buffer, extend funding maturities, and review the CFP to ensure minimum LCR is maintained even in stress.
Explanation: Stress test purpose = anticipate and prevent. Pre-emptive action: build HQLA, extend maturities, strengthen CFP.
Question 63
Covered bond asset encumbrance creates liquidity risk for unsecured creditors because:
Select an option first.
Correct answer: B — Cover pool assets are ring-fenced, leaving fewer free assets for general creditors in resolution — structural subordination.
Explanation: Cover pool ring-fencing = structural subordination for unsecured creditors. High encumbrance worsens unsecured recovery.
Question 64
'Market depth' of a financial asset refers to:
Select an option first.
Correct answer: B — The ability of the market to absorb large orders without causing significant price movements.
Explanation: Market depth = capacity to transact large size without price impact. Deep market = liquid. Shallow market = illiquid.
Question 65
The 'throughput ratio' in intraday liquidity measures:
Select an option first.
Correct answer: B — Proportion of a bank's payment obligations settled early in the day — higher throughput = more proactive liquidity management = less end-of-day gridlock risk.
Explanation: BCBS 248 indicator: banks sending payments early signals proactive intraday liquidity management.
Get the full FRM question bank — free
Drop your email and we'll send you fresh FRM practice questions, fully worked solutions and exam-deadline reminders. No spam — unsubscribe in one click.
Want to save your score and take a full mock exam? Create a free account →
Question 66
HQLA 'monetisation' refers to:
Select an option first.
Correct answer: B — Converting HQLA into cash through sale or repo — the actual realisation of the buffer's value in stress.
Explanation: Monetisation = turning HQLA into cash. Banks must demonstrate they can actually monetise HQLA operationally (no regulatory impediments).
Question 67
The phased LCR implementation (60% in 2015 → 100% in 2019) aimed to:
Select an option first.
Correct answer: B — Allow orderly build-up of HQLA portfolios without simultaneously creating large demand for eligible assets that could distort markets.
Explanation: Phase-in rationale: prevent simultaneous demand for HQLA from all banks causing market distortion.
Question 68
A bank has inflows of €4bn and outflows of €7bn. The LCR net outflow (applying the 75% inflow cap) is:
Select an option first.
Correct answer: B — €7bn − min(€4bn, 75%×€7bn) = €7bn − min(€4bn, €5.25bn) = €7bn − €4bn = €3bn
Explanation: 75% cap = €5.25bn. Actual inflows €4bn < cap → full €4bn recognised. Net = €7bn − €4bn = €3bn. Formula: Outflows − min(Inflows, 75%×Outflows).
Question 69
The 75% inflow cap in LCR exists to:
Select an option first.
Correct answer: B — Prevent banks from assuming most outflows will be offset by inflows — forcing them to hold genuine HQLA rather than relying on cash-flow timing.
Explanation: Without the cap, a bank with large expected inflows could argue minimal HQLA is needed. The cap forces HQLA as a genuine buffer independent of hoped-for inflows.
Question 70
HQLA 'operational requirements' under Basel III mean banks must demonstrate:
Select an option first.
Correct answer: B — Assets are operationally ready — periodically tested via repo/sale, managed by the liquidity function, and free of legal impediments to monetisation.
Explanation: Operational requirements ensure HQLA is not just theoretical: tested monetisation, liquidity function control, no legal restrictions on selling.
Question 71
'Intraday liquidity is more dangerous than overnight liquidity' because:
Select an option first.
Correct answer: B — Intraday gridlock in RTGS can cascade within hours — one bank delaying payments blocks others, creating systemic settlement failure before CB intervention can occur.
Explanation: RTGS gridlock can propagate within hours. Speed matters — intraday crises can spiral before any intervention.
Question 72
A €500m 2-year bond issued by the bank with 100% ASF factor means:
Select an option first.
Correct answer: B — The full €500m counts as stable funding because it has >1yr remaining maturity and won't mature within the 1-year NSFR horizon.
Explanation: ASF factor = 100% for >1yr maturity liabilities. Full face value counts as Available Stable Funding.
Question 73
The 'illiquidity spiral' in 2007-09 was characterised by:
Select an option first.
Correct answer: B — Self-reinforcing cycle: falling asset prices → margin calls → forced sales → further price declines → increased haircuts → reduced funding → more forced sales.
Explanation: The illiquidity/margin spiral: Brunnermeier (2009). The key mechanism of the 2008 crisis.
Question 74
Liquidity-adjusted Expected Shortfall accounts for:
Select an option first.
Correct answer: B — Expected loss in worst tail scenarios PLUS additional cost of liquidating the position including bid-ask spread and market impact.
Explanation: Liquidity-adjusted ES = standard ES + ½ × spread × position + market impact cost.
Question 75
Repo markets are the most important short-term funding market because:
Select an option first.
Correct answer: B — Repo allows rapid, large-scale, secured borrowing at near risk-free rates — its disruption (2008) immediately created severe liquidity crises for even well-capitalised firms.
Explanation: Repo = financial system plumbing. Lehman's failure was directly linked to repo market disruption.
Question 76
BCBS 248 intraday monitoring tools include as the key metric:
Select an option first.
Correct answer: B — Daily maximum intraday liquidity usage — peak demand experienced during the day versus available intraday capacity.
Explanation: Maximum intraday liquidity usage captures worst-case intraday demand for liquidity, informing buffer sizing.
Question 77
A stress test shows retail deposits down 10%, wholesale down 50%, and HQLA covers 85% of net outflows. The correct management response is:
Select an option first.
Correct answer: B — Build HQLA by at least 15% of net outflows AND reduce wholesale funding concentration — addressing both the shortfall and its root cause.
Explanation: Dual response: build HQLA to meet minimum AND structurally address the funding vulnerability.
Question 78
Non-maturity deposits (NMDs) in liquidity modelling must be decomposed into:
Select an option first.
Correct answer: B — 'Core' (stable, long effective maturity) and 'volatile' (transient, short effective maturity) components using historical statistical analysis.
Explanation: NMD behavioural modelling: core = stable long-tenure balance; volatile = rate-sensitive transient balance. Each assigned different effective maturities.
Question 79
Contractual maturity mismatch in BCBS 248 monitoring provides:
Select an option first.
Correct answer: B — A baseline (no behavioural assumptions) showing contractual inflows and outflows — the worst-case gap before any stickiness assumptions.
Explanation: Contractual gap = raw structural gap without behavioural adjustments. Behavioural overlays are applied separately.
Question 80
The distinction between a liquidity crisis and solvency crisis matters for policy because:
Select an option first.
Correct answer: B — A liquidity crisis (cannot fund operations) can be resolved by CB lending; a solvency crisis (assets < liabilities) requires recapitalisation. Lending to insolvent banks wastes public money.
Explanation: Bagehot's rule applies to solvent-but-illiquid banks. Lending to insolvent banks is a bailout, not LOLR.
Question 81
SOFR differs from Fed Funds Rate in that:
Select an option first.
Correct answer: B — SOFR measures secured overnight repo rates collateralised by US Treasuries; Fed Funds measures unsecured interbank overnight lending. SOFR is more transaction-rich and lower.
Explanation: SOFR = $1trn+ daily secured overnight transactions. Fed Funds = smaller unsecured interbank market. SOFR replaced LIBOR.
Question 82
The LOLR function creates moral hazard because:
Select an option first.
Correct answer: B — If banks believe CBs will always rescue them, they take on more liquidity risk than is socially optimal — reducing private incentives for prudent liquidity management.
Explanation: LOLR moral hazard: Bagehot's penalty rate mitigates but doesn't eliminate this. TBTF amplifies it for large banks.
Question 83
The SVB failure (March 2023) primarily illustrates:
Select an option first.
Correct answer: B — Concentrated uninsured deposits + large HTM portfolio with unrealised interest rate losses → social-media-amplified run when losses disclosed — digital speed of modern bank runs.
Explanation: SVB: concentrated sophisticated uninsured depositors + IRRBB (HTM unrealised losses) + digital/social media accelerated run = $42bn withdrawal requests in one day.
Question 84
'Price elasticity' of funding matters for liquidity management because:
Select an option first.
Correct answer: B — A bank in distress offering higher rates may fail to retain deposits if confidence is shaken (backward-bending supply) — understanding this helps CFP design.
Explanation: In a confidence crisis, raising deposit rates signals desperation and can accelerate outflows — the demand curve bends backward.
Question 85
In a cumulative funding gap analysis showing: 1-week: −€1bn, 1-month: −€3bn, 3-months: −€5bn, which is the highest priority?
Select an option first.
Correct answer: B — The 1-week gap — must be covered by existing HQLA first. Short-term gaps are existential; longer-term gaps can be addressed through strategy.
Explanation: Near-term gaps are existential. A bank fails if it cannot fund the next week regardless of its 3-month plan.
Question 86
Which of the following is the most important characteristic that distinguishes 'HQLA' from other liquid assets?
Select an option first.
Correct answer: B — They can be converted to cash quickly with little or no loss of value even in stressed market conditions.
Explanation: HQLA must be monetisable in stress: low price impact, deep market, standardised, low credit/market risk.
Question 87
The 'liquidity horizon' for a position in a VaR model is set by:
Select an option first.
Correct answer: B — The time needed to exit or hedge the position without materially moving its price — longer for large or illiquid positions.
Explanation: Liquidity horizon = time to unwind without significant market impact. Drives the holding period used in VaR/ES.
Question 88
A bank's 'liquidity risk premium' embedded in FTP represents:
Select an option first.
Correct answer: B — The compensation for bearing the cost of maintaining a liquidity buffer and funding illiquid assets with stable, longer-term funding.
Explanation: FTP liquidity premium = cost of maintaining the LCR buffer + term funding spread. Business units funding illiquid assets must be charged this.
Question 89
The '2008 LIBOR-OIS spread' widening was a signal of:
Select an option first.
Correct answer: B — Acute systemic funding liquidity stress — unsecured interbank lending rates rose sharply relative to the risk-free overnight rate as banks refused to lend to each other.
Explanation: LIBOR-OIS: LIBOR (unsecured interbank) rose sharply vs OIS (nearly risk-free). The gap = bank credit/liquidity risk premium. In 2008 it widened to over 300bp.
Question 90
'Liquidity at risk' (LaR) is analogous to Value at Risk but measures:
Select an option first.
Correct answer: B — The potential liquidity shortfall (cash outflows minus inflows) at a given confidence level over a specified horizon under stress.
Explanation: LaR = potential funding gap at X% confidence. Analogous to VaR but focuses on cash flow shortfall rather than P&L loss.
More free FRM topics
Ten questions in
- The ones you miss are saved as a drill you can repeat
- Your place is kept, on this device and any other
- A streak, if that is the thing that gets you back tomorrow
Every question on this page stays free and open either way.