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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 211
The 'resolution stay powers' under BRRD allow resolution authorities to:
Select an option first.
Correct answer: B — Temporarily suspend termination rights in derivative contracts and other financial contracts — preventing a wave of immediate terminations that would amplify the liquidity crisis during resolution.
Explanation: Resolution stays: BRRD Article 69-71 allow authorities to impose temporary stays on close-out netting and early termination rights in derivatives — preventing a resolution from being immediately destabilised by mass contract terminations.
Question 212
The 'liquidity supervision intensity' for a bank is primarily determined by:
Select an option first.
Correct answer: B — The bank's size, complexity, systemic importance, risk profile, and quality of risk management — larger, more complex, and riskier banks face more intensive supervisory engagement.
Explanation: Supervisory intensity: proportionate to systemic importance, risk profile, and governance quality. G-SIBs face highest intensity; community banks face lighter touch.
Question 213
Under the 'Interagency Policy Statement on Funding and Liquidity Risk Management' issued by US regulators (2010), banks are expected to:
Select an option first.
Correct answer: B — Understand and manage their liquidity risk through a comprehensive framework covering strategy, governance, measurement, controls, stress testing, CFP, and appropriate liquidity reserves.
Explanation: US 2010 Interagency Policy: established the expectation for comprehensive liquidity risk management. Predates formal US LCR implementation and covers qualitative governance as well as quantitative standards.
Question 214
The 'crisis management group' (CMG) for a G-SIB involves:
Select an option first.
Correct answer: B — Key home and host supervisors and resolution authorities from all major jurisdictions where the G-SIB operates — meeting regularly to coordinate resolution planning and information sharing.
Explanation: CMG: G-SIBs maintain CMGs with their key jurisdictions' supervisors/resolution authorities. Coordinated resolution planning across borders is essential for globally systemic banks.
Question 215
The 'contingent convertible bonds' (CoCos, AT1 instruments) contribute to resolution liquidity by:
Select an option first.
Correct answer: B — Absorbing losses when the bank is under stress (through write-down or conversion to equity) — improving the bank's solvency position, which can stabilise funding and prevent liquidity deterioration.
Explanation: CoCos in resolution: loss absorption (write-down or conversion) improves capital adequacy → restores confidence → stabilises funding. They address solvency stress that can trigger liquidity stress. They don't directly provide liquidity.
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Question 216
The 'bank levy' or 'resolution fund contribution' paid by banks in many jurisdictions:
Select an option first.
Correct answer: B — Creates a pre-funded pool of resources that resolution authorities can use to support critical functions and provide liquidity in resolution — reducing reliance on public funds.
Explanation: Bank levies/resolution fund (e.g., EU Single Resolution Fund): pre-funded by industry contributions. Used to support resolution tools, provide liquidity, and fund guarantee schemes. Reduces reliance on public funds.
Question 217
The 'stress testing of liquidity risk' under the EBA SREP Guidelines requires supervisors to assess:
Select an option first.
Correct answer: B — The adequacy of the bank's internal liquidity stress tests — including scenario coverage, severity, assumptions, and the management actions envisaged — as part of the overall SREP assessment.
Explanation: SREP liquidity stress assessment: supervisors evaluate whether bank's internal stress tests are adequate — not just whether LCR is met. Quality of methodology matters.
Question 218
The 'FSB Key Attributes of Effective Resolution Regimes' establish:
Select an option first.
Correct answer: B — Essential features that resolution regimes must have: resolution authority with adequate powers, tools (bail-in, bridge bank, asset separation), safeguards for creditors, and cross-border cooperation mechanisms.
Explanation: FSB Key Attributes (2011, updated 2014): foundational global resolution standard. Bail-in, bridge bank, asset separation tools. Cross-border coordination. These underpin BRRD, Dodd-Frank Title II, UK Banking Act.
Question 219
When a supervisor imposes a 'moratorium' on a bank (temporarily suspending debt repayments), this tool is used to:
Select an option first.
Correct answer: B — Buy time for resolution or restructuring by preventing a wave of immediate creditor claims — giving resolution authorities time to implement an orderly resolution without a disorderly run.
Explanation: Moratorium: BRRD Article 69 tool. Temporarily suspends payment obligations to prevent panic and give resolution authorities time to act. Used sparingly and for limited periods.
Question 220
The 'liquidity implications of margin requirements on centrally cleared derivatives' under EMIR are:
Select an option first.
Correct answer: B — Banks must post initial margin and daily variation margin to CCPs — creating significant, ongoing liquidity demands that must be incorporated into liquidity planning and stress testing.
Explanation: CCP margin liquidity: initial margin (large upfront posted at CCP) and daily variation margin (mark-to-market calls) create significant liquidity demands. EMIR mandated central clearing → increased CCP margin requirements.
Question 221
The 'phased introduction of NSFR' into EU law via CRR2 was completed in:
Select an option first.
Correct answer: B — June 2021 — the NSFR became binding in the EU through the implementation of CRR2, requiring all institutions to maintain NSFR ≥ 100%.
Explanation: EU NSFR implementation: CRR2 introduced binding NSFR requirement from June 28, 2021. Prior to this, the NSFR was monitored but not a binding minimum in the EU.
Question 222
The 'operational continuity in resolution' concept requires G-SIBs to plan for:
Select an option first.
Correct answer: B — Maintaining critical shared services (IT systems, HR, finance, risk infrastructure) during resolution — ensuring that operational functions supporting critical banking services continue even as the legal structure is restructured.
Explanation: Operational continuity in resolution (OCIR): resolution authorities need banks to identify and pre-position arrangements ensuring critical services can continue during resolution. IT, risk, and finance functions must be maintained.
Question 223
The 'tiered liquidity stress testing' approach recommended by central banks and supervisors means:
Select an option first.
Correct answer: B — Different banks use stress tests calibrated to their own risk profile and business model — a retail bank's stress scenarios should reflect retail depositor behaviour, while a wholesale bank's should focus on interbank markets.
Explanation: Tiered approach: stress scenarios tailored to the bank's specific business model, funding structure, and risk profile. A universal scenario may be either too severe or insufficiently severe for a given bank.
Question 224
In the context of supervisory colleges for cross-border banks, the 'liquidity waiver' mechanism under CRD allows:
Select an option first.
Correct answer: B — A parent bank to apply for a waiver allowing consolidated group LCR management rather than separate country-by-country compliance — subject to strict qualifying conditions and host supervisor agreement.
Explanation: CRR liquidity waiver (Article 8): EU parent banks can apply for intragroup liquidity waiver allowing group-level LCR management. Requires host supervisor agreement and qualifying conditions on free capital flow.
Question 225
The 'regulatory treatment of central bank reserve requirements' in the LCR context means:
Select an option first.
Correct answer: B — Only the 'excess reserves' beyond minimum reserve requirements qualify as Level 1 HQLA — minimum required reserves are locked up and not freely available to the bank.
Explanation: LCR reserve treatment: minimum required reserves are not freely available (must be held at CB) → not HQLA. Excess reserves beyond the required minimum are Level 1 HQLA. Important distinction for banks with high reserve requirements.
Question 226
The 'resolution planning for financial market infrastructures' (CCPs, CSDs, payment systems) is important for bank liquidity because:
Select an option first.
Correct answer: B — If a major CCP enters resolution, the resulting collateral calls, default fund drawdowns, and operational disruptions could create severe simultaneous liquidity demands across many member banks.
Explanation: FMI resolution risk: a CCP default or severe stress would cascade to all members. IOSCO and FSB have established FMI recovery and resolution guidelines precisely because of the systemic liquidity implications.
Question 227
The 'annual supervisory engagement cycle' for a significant bank's liquidity risk typically follows the sequence:
Select an option first.
Correct answer: B — Continuous monitoring → ILAAP review → SREP assessment → supervisory measures (if needed) → follow-up monitoring → next cycle. This provides structured, regular supervisory oversight.
Explanation: Supervisory cycle: continuous offsite monitoring + annual ILAAP review + SREP = continuous oversight. Supervisory measures (SLR, guidance) are outcomes. Follow-up confirms remediation.
Question 228
The 'macroprudential use of the countercyclical capital buffer' (CCyB) interacts with bank liquidity because:
Select an option first.
Correct answer: B — When the CCyB is released (during downturns), banks can use freed-up capital to absorb losses without cutting credit — reducing the procyclical tightening of lending standards and wholesale funding that amplifies liquidity stress.
Explanation: CCyB-liquidity interaction: capital release → banks can absorb losses without emergency asset sales → reduces fire sale risk → supports funding market stability. Capital and liquidity policies interact.
Question 229
Under the 'BCBS 239 risk data aggregation principles', the requirement most relevant to liquidity risk management is:
Select an option first.
Correct answer: B — The ability to rapidly aggregate liquidity risk data across legal entities, currencies, and business lines in normal times AND under stress — providing management with a complete picture of liquidity position at any time.
Explanation: BCBS 239 for liquidity: rapid aggregation capability. During the 2008 crisis, many banks could not tell their own executives the firm's total liquidity position across all entities and currencies. This was a critical governance failure.
Question 230
The 'supervisory benchmarking' exercise conducted by the EBA compares banks' internal IRRBB models by:
Select an option first.
Correct answer: B — Applying a common standardised test portfolio to each bank's internal IRRBB model and comparing the resulting EVE and NII sensitivities — identifying modelling outliers and excessive variation.
Explanation: EBA IRRBB benchmarking: standardised test portfolios reveal how much internal model results vary across banks for the same exposure. Extreme outliers attract supervisory scrutiny.
Question 231
The 'resolution fund' contribution calculations under EU SRM (Single Resolution Mechanism) are based on:
Select an option first.
Correct answer: B — A combination of the bank's size (total liabilities minus own funds and covered deposits) and a risk-adjustment factor reflecting the bank's individual risk profile — riskier banks contribute more.
Explanation: SRM fund contributions: risk-adjusted ex-ante contributions. Base = size; adjustment = risk profile. Higher-risk banks pay more, incentivising sound risk management.
Question 232
The 'supervisory stress test results publication' by the EBA serves to:
Select an option first.
Correct answer: B — Enable market participants, investors, and analysts to assess the relative resilience of European banks and hold management accountable — enhancing market discipline (Pillar 3) through transparency.
Explanation: EBA stress test publication: transparency enables market discipline. Investors, analysts, and counterparties can use results to assess relative resilience. Banks weaker than peers face market pressure to strengthen.
Question 233
The 'liquidity risk management principles' require that a bank's 'liquidity risk framework' be:
Select an option first.
Correct answer: B — A dynamic, regularly reviewed and updated framework that reflects changes in the bank's business model, risk profile, regulatory requirements, and market environment.
Explanation: Dynamic framework: regular review (at least annual, triggered by material changes) ensures the framework remains appropriate. The bank's business model and environment change continuously.
Question 234
The 'recovery capacity assessment' in a bank's recovery plan must demonstrate:
Select an option first.
Correct answer: B — That the bank has sufficient recovery capacity — the aggregate liquidity generation potential of all recovery actions exceeds the projected peak liquidity need in the most severe scenarios considered.
Explanation: Recovery capacity adequacy: total potential liquidity from ALL recovery actions (with probability of execution and timing) must exceed the peak liquidity deficit in the most severe scenario. Demonstrates recovery is credible.
Question 235
The 'supervisory stress test' framework distinguishes between 'top-down' and 'bottom-up' approaches. A 'bottom-up' stress test means:
Select an option first.
Correct answer: B — Each individual bank applies the supervisory scenario to its own detailed portfolio data and models — producing bank-specific stress results that reflect the institution's unique risk profile and exposures.
Explanation: Bottom-up stress test: banks use their own models and data to calculate impact of the supervisory scenario. Top-down: regulator applies scenario to sector aggregate. Bottom-up is more granular and institution-specific.
Question 236
Under the 'PRA Internal Model Approach' for liquidity, the bank must demonstrate that:
Select an option first.
Correct answer: B — The internal model captures all material liquidity risks, is based on sound methodology, is regularly validated and backtested, and produces results that are used in day-to-day risk management.
Explanation: Internal model requirements: comprehensive risk coverage, sound methodology, validation/backtesting, and use in management decision-making. Supervisors must approve and periodically review.
Question 237
The 'EBA Opinion on net stable funding' issued in 2020 recommended clarifications to:
Select an option first.
Correct answer: B — Improve the consistency of NSFR implementation across EU member states, particularly regarding the treatment of certain products and the calibration of ASF/RSF factors for EU-specific instruments.
Explanation: EBA NSFR Opinion 2020: addressed implementation inconsistencies across member states, particularly for intragroup transactions, derivative netting, and EU-specific products. Recommendations fed into CRR2 delegated acts.
Question 238
The 'resolution authority's assessment of resolvability' examines whether:
Select an option first.
Correct answer: B — The bank can be resolved in an orderly manner — including whether critical functions can be maintained, whether there are legal, operational, or financial barriers to resolution, and whether bail-in can be executed effectively.
Explanation: Resolvability assessment: resolution authority tests whether the resolution strategy is credible and feasible. Barriers include: complex legal structure, operational interdependencies, cross-border legal obstacles, insufficient MREL/TLAC.
Question 239
The 'qualitative assessment' in the SREP covers which dimensions of bank management?
Select an option first.
Correct answer: B — Governance and risk culture, business model sustainability, risk management framework quality, and capital/liquidity adequacy — the 'soft' dimensions that quantitative metrics cannot fully capture.
Explanation: SREP qualitative assessment: governance quality, risk culture, management depth, risk management framework maturity. These dimensions affect the supervisory multiplier applied to quantitative risk assessments.
Question 240
The 'liquidity risk reporting calendar' for a bank supervised by the ECB includes:
Select an option first.
Correct answer: B — Daily monitoring data reported to the JST, monthly LCR/ALMM reports, quarterly ILAAP updates, and annual full ILAAP submission — covering different levels of granularity at different frequencies.
Explanation: ECB supervisory reporting calendar for SIs: daily monitoring → monthly LCR/NSFR → quarterly internal management reports → annual ILAAP. Multi-frequency oversight.
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