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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 151
BCBS 248 market-related monitoring tools include:
Select an option first.
Correct answer: B — CDS spreads of banks, equity prices, money market rates, and yield spreads — market-based early warning signals of systemic stress.
Explanation: Market monitoring: CDS, equity prices, SOFR-OIS spread, repo rates, VIX. Real-time stress signals.
Question 152
A bank's liquidity risk governance framework must include:
Select an option first.
Correct answer: B — Board-approved risk appetite, risk management framework, independent oversight, CFP, and internal reporting requirements.
Explanation: Governance framework: board appetite → framework → risk management → CFP → reporting.
Question 153
Cross-border 'ring-fencing' risk in multinational banking groups arises when:
Select an option first.
Correct answer: B — Host regulators require subsidiary standalone liquidity buffers, preventing free intragroup liquidity flows — creating inefficiency but protecting local depositors.
Explanation: Ring-fencing: host country protection vs group liquidity optimisation tension.
Question 154
G-SIB ILAAP requirements include:
Select an option first.
Correct answer: B — Comprehensive assessment covering all liquidity risk dimensions — stress testing, buffer adequacy, governance, and CFP across all time horizons, currencies, and legal entities.
Explanation: G-SIB ILAAP: FSB and national regulators require the most comprehensive liquidity self-assessment.
Question 155
Simplified NSFR under EU CRR2 proportionality:
Select an option first.
Correct answer: B — Simplified ASF and RSF categories with fewer line items — reducing reporting burden for smaller, less complex institutions.
Explanation: Simplified NSFR (CRR2 Article 428h): fewer line items, simplified weights for non-systemic institutions.
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Question 156
BRRD recovery plan scenarios must include:
Select an option first.
Correct answer: B — Bank-specific (idiosyncratic) stress, market-wide (systemic) stress, combined scenarios, and rapid deterioration scenarios — covering all dimensions.
Explanation: BRRD scenario coverage: idiosyncratic, systemic, combined, rapid. Both capital and liquidity dimensions.
Question 157
P2 Guidance for liquidity (Supervisory Liquidity Add-On) differs from Pillar 1 LCR because:
Select an option first.
Correct answer: B — P2 Guidance is bank-specific, set based on individual risk profile and ILAAP quality — applied on top of the standard 100% minimum.
Explanation: P2 Guidance: institution-specific. Pillar 1: uniform 100% minimum. P2 can require LCR well above 100%.
Question 158
Operational risk dimensions of liquidity management refer to:
Select an option first.
Correct answer: B — Failures in IT systems, processes, or people preventing execution of the liquidity strategy — system failures blocking repo access or settlement failures.
Explanation: Operational risk-liquidity interaction: the liquidity plan assumes the bank can actually execute it. System failures prevent this.
Question 159
LCR reporting frequency under Basel III/CRR2 requires:
Select an option first.
Correct answer: B — Monthly reporting for all banks, daily calculation for significant institutions, and immediate notification if LCR falls below 100%.
Explanation: LCR reporting: monthly for all; daily calculation for SIs; breach → immediate notification to supervisor.
Question 160
A bank's liquidity risk appetite statement covers:
Select an option first.
Correct answer: B — Multiple horizons: intraday, short-term (30-day LCR), medium-term (1-year NSFR), and structural — each with specific metrics.
Explanation: Multi-horizon liquidity appetite: intraday (intraday limits), short-term (LCR level), medium-term (NSFR, gap), structural (encumbrance, LTD ratio).
Question 161
Currency-specific LCR is required because:
Select an option first.
Correct answer: B — Foreign currency HQLA may not be freely transferable to meet outflows in another currency — a EUR HQLA cannot necessarily cover USD outflows in stress.
Explanation: Currency LCR: cross-currency swaps may be dysfunctional in stress. Currency mismatches create hidden liquidity risk.
Question 162
NSFR treatment of undrawn committed credit lines:
Select an option first.
Correct answer: B — A 5% RSF factor reflects that a portion of undrawn commitments may be drawn over the 1-year horizon — requiring some stable funding support.
Explanation: NSFR OBS: 5% RSF for undrawn credit lines. Off-balance-sheet contingent obligations require stable funding.
Question 163
Systemic liquidity risk is a public policy concern because:
Select an option first.
Correct answer: B — Liquidity problems at one bank create contagion, fire sale externalities, and payment gridlock — no individual bank internalises these externalities, requiring collective policy action.
Explanation: Systemic externalities: contagion, fire sales, payment gridlock — justify public intervention.
Question 164
A 'Systemic Risk Buffer' for liquidity requires systemically important banks to hold:
Select an option first.
Correct answer: B — A bank-specific higher LCR or liquidity requirement above the 100% Pillar 1 minimum — reflecting the systemic cost of potential failure.
Explanation: Systemic Liquidity Buffer: some national regulators (Swedish FSA, DNB) impose higher LCR for D-SIBs.
Question 165
The credible funding plan in ILAAP must demonstrate:
Select an option first.
Correct answer: B — A feasible base-case funding plan with specific sources and amounts AND contingency options for stress — with demonstrated capacity to execute.
Explanation: Credible funding plan: base case (normal funding) + stress case (contingency options). Both quantified and feasible.
Question 166
Liquidity regulation post-2008 addressed the specific failure mode of:
Select an option first.
Correct answer: B — Excessive reliance on short-term wholesale funding with near-zero liquid buffers — when wholesale markets froze, immediate funding crises resulted.
Explanation: Pre-2008 failure: no HQLA (LCR addresses this) + reliance on short-term wholesale (NSFR addresses this).
Question 167
The annual 'Supervisory Liquidity Assessment' letter sets:
Select an option first.
Correct answer: B — Bank-specific liquidity requirements and guidance above standard minimums — based on individual risk profile and ILAAP quality assessment.
Explanation: Supervisory liquidity letter: bank-specific P2 Requirement/Guidance after SREP/ILAAP review.
Question 168
EBA ILAAP guidelines' 'internal perspective' vs 'normative perspective':
Select an option first.
Correct answer: B — Internal: bank's own adequacy assessment using internal models. Normative: compliance with external regulatory ratios (LCR, NSFR). Both must be satisfied.
Explanation: Dual perspectives: internal/economic (internal models) and normative/regulatory (LCR, NSFR compliance).
Question 169
The 'funding concentration' monitoring metric (BCBS 248) tracks:
Select an option first.
Correct answer: B — Percentage of total funding from each counterparty, instrument type, and currency — to identify over-reliance on any single funding source.
Explanation: Funding concentration monitoring: by counterparty, by product, by currency, by maturity bucket.
Question 170
EBA liquidity stress testing assesses:
Select an option first.
Correct answer: B — LCR adequacy under stress, HQLA quality, funding structure vulnerabilities, and resilience across combined stress scenarios at the EU system level.
Explanation: EBA liquidity stress test: LCR, HQLA, funding vulnerabilities, scenario-based analysis.
Question 171
BCBS 248 market monitoring tools include:
Select an option first.
Correct answer: B — CDS spreads, equity prices of financial institutions, money market spreads (SOFR-OIS), secured funding rates, and volatility indices.
Explanation: Market-based EWIs: CDS, equity, money market spreads, repo rates, VIX. Real-time stress signals.
Question 172
Under the ECB's Single Supervisory Mechanism (SSM), liquidity supervision of SIs includes:
Select an option first.
Correct answer: B — Joint Supervisory Teams conducting SREP/ILAAP reviews, on-site inspections, liquidity stress tests, and bank-specific supervisory measures.
Explanation: SSM liquidity supervision: JSTs (ECB + NCAs) conduct SREP, ILAAP review, on-site inspections, horizontal assessments.
Question 173
National supervisory liquidity returns (e.g., ALMM in EU) complement LCR/NSFR by:
Select an option first.
Correct answer: B — Providing granular local-market-specific data supplementing standard EU reporting — enabling tailored supervisory oversight.
Explanation: ALMM (Additional Liquidity Monitoring Metrics): EU-mandated granular returns supplementing LCR/NSFR.
Question 174
'Liquidity Recovery Capacity' (LRC) in recovery planning represents:
Select an option first.
Correct answer: B — The total liquidity that a bank could generate through all available recovery actions — asset sales, secured funding, CB facilities, unsecured issuance.
Explanation: LRC: total potential liquidity from executing ALL recovery actions. Must exceed stress liquidity needs.
Question 175
MFI balance sheet data published by central banks is used for:
Select an option first.
Correct answer: B — Monitoring systemic liquidity trends across the banking system — tracking funding structure shifts, HQLA levels, and systemic vulnerabilities.
Explanation: MFI data: macroprudential monitoring of aggregate bank balance sheet trends.
Question 176
The 'Resolution Liquidity Execution Need' (RLEN) estimates:
Select an option first.
Correct answer: B — Liquidity needed during resolution — covering operational cash needs and any funding gaps as the failing institution's funding evaporates.
Explanation: RLEN: FSB/resolution authorities estimate operational and structural liquidity needs during active resolution.
Question 177
Basel Committee's 2008 Principles for Sound Liquidity Risk Management established:
Select an option first.
Correct answer: B — 17 principles covering board risk tolerance, management implementation, stress testing, CFP, and public disclosure.
Explanation: Basel 2008 Liquidity Principles: 17 principles, qualitative framework predating LCR/NSFR. Still current best practice.
Question 178
A bank with LCR 140% but NSFR 90% should primarily address:
Select an option first.
Correct answer: B — The structural long-term funding mismatch — NSFR below 100% means excessive reliance on short-term funding for illiquid assets, even though short-term liquidity appears adequate.
Explanation: LCR + NSFR: LCR = short-term OK; NSFR = structural funding model unsound. Both must be addressed.
Question 179
Post-SVB collapse regulatory proposals reflect which lesson:
Select an option first.
Correct answer: B — SVB highlighted: faster digital bank runs needing higher LCR floors; uninsured depositor risk underestimated; IRRBB creating confidence loss; social media amplifying speed.
Explanation: SVB 2023 lessons: digital runs, uninsured depositor concentration, IRRBB, social media = new risk dimensions.
Question 180
'Critical functions' concept in resolution planning for liquidity means:
Select an option first.
Correct answer: B — Payment system participation, deposit servicing, and critical credit facilities must be maintained with adequate liquidity even as other activities are wound down.
Explanation: Critical functions: payment/clearing, deposit access, critical credit lines. These need dedicated resolution liquidity.
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