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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 241
The 'BRRD resolution tools' available to resolution authorities include all of the following EXCEPT:
Select an option first.
Correct answer: B — Mandatory equity issuance to new private investors chosen by the bank.
Explanation: BRRD tools: (1) sale of business; (2) bridge institution; (3) asset separation; (4) bail-in. Mandatory equity issuance to private investors of the bank's choosing (B) is not a BRRD resolution tool — that would be a private recapitalisation, not resolution.
Question 242
The 'proportionality framework' for ILAAP under EBA guidelines means that:
Select an option first.
Correct answer: B — The depth, detail, and sophistication of the ILAAP should reflect the bank's size, complexity, and risk profile — a community bank's ILAAP differs from a G-SIB's in scope and analytical depth.
Explanation: Proportionality in ILAAP: smaller, simpler banks have simpler ILAAPs. G-SIBs require multi-scenario, multi-currency, multi-entity comprehensive ILAAPs. EBA guidelines explicitly acknowledge this proportionality.
Question 243
The 'Basel III leverage ratio' interacts with liquidity risk because:
Select an option first.
Correct answer: B — Constraints on total exposure can reduce a bank's ability to expand its balance sheet — limiting repo market activity and securities financing, which can reduce overall market liquidity if binding across the system.
Explanation: Leverage ratio-liquidity interaction: repo activity (expanding balance sheet) is constrained by leverage ratio. This reduces banks' market-making and repo capacity, potentially reducing market liquidity in certain asset classes.
Question 244
The 'macroprudential authority's toolkit' for addressing systemic liquidity risk includes all of the following EXCEPT:
Select an option first.
Correct answer: B — Individual bank loan approvals for specific borrowers.
Explanation: Macroprudential tools: CCyB, sectoral buffers, LTV/LTI limits, systemic risk buffers, DSTI ratios. Individual loan approval (B) is a microprudential credit decision, not a macroprudential systemic tool.
Question 245
The 'ICAAP-ILAAP integration' requirement under EBA guidelines means:
Select an option first.
Correct answer: B — The ICAAP and ILAAP are coordinated — capital and liquidity are assessed together to ensure the bank remains viable from both perspectives simultaneously, recognising that capital and liquidity crises are often linked.
Explanation: ICAAP-ILAAP integration: a bank that passes its ICAAP but fails its ILAAP is not viable. Both dimensions must be adequate simultaneously. Capital and liquidity crises reinforce each other (SVB: IRRBB capital losses triggered liquidity crisis).
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Question 246
The 'resolvability of a bank's liquidity position in resolution' requires that:
Select an option first.
Correct answer: B — Sufficient liquid assets are pre-positioned in each material legal entity and resolution group to fund critical operations during resolution — without relying on intragroup transfers that may be legally or operationally constrained.
Explanation: Resolution liquidity pre-positioning: resolution entities need standalone liquidity because intragroup transfers may not be possible during resolution. Pre-positioning of RLEN-eligible assets in each entity is a key resolvability requirement.
Question 247
The 'Basel IV final rule' (December 2017) included which changes relevant to liquidity risk capital?
Select an option first.
Correct answer: B — Maintained IRRBB under Pillar 2, refined the standardised framework for EVE calculation, and introduced new disclosure requirements — but did not introduce a Pillar 1 capital charge for IRRBB.
Explanation: Basel IV IRRBB: confirmed Pillar 2 approach (no Pillar 1 charge), refined the standardised EVE calculation methodology, and strengthened disclosure. The 15% outlier threshold was maintained.
Question 248
In 'recovery and resolution' planning, the 'bail-in execution mechanism' requires that:
Select an option first.
Correct answer: B — Eligible liabilities are written down or converted in a specified order of creditor hierarchy — senior unsecured after Tier 2, AT1, and equity — with depositors (insured) at the top of the hierarchy (last to be bailed in).
Explanation: Bail-in hierarchy: equity first → AT1 → Tier 2 → senior unsecured → (depositors last, with retail insured depositors fully protected). The order follows the creditor hierarchy.
Question 249
The 'liquidity risk governance' principle requiring 'independence of the risk oversight function' means:
Select an option first.
Correct answer: B — The liquidity risk management function must be able to challenge business lines and treasury without conflict of interest — organisationally and functionally independent from P&L-generating activities.
Explanation: Independence principle: risk management (second line) must be organisationally separate from treasury/business (first line). The risk CRO must be able to escalate concerns without being overruled by commercial interests.
Question 250
The EBA's 'Guidelines on Remuneration' interact with liquidity risk governance by requiring:
Select an option first.
Correct answer: B — That remuneration policies do not incentivise excessive risk-taking — including excessive liquidity risk — and that performance metrics for staff include risk-adjusted measures that capture liquidity risk costs.
Explanation: Remuneration-liquidity governance: if traders/business units are rewarded only for volume/revenue without factoring in the liquidity cost of their activities, they will systematically take excessive liquidity risk. Remuneration must incorporate risk adjustments.
Question 251
The 'Supervisory Convergence' goal of the EBA in liquidity supervision aims to achieve:
Select an option first.
Correct answer: B — Consistent application of regulatory standards and supervisory practices across all EU member states — reducing regulatory arbitrage and ensuring a level playing field.
Explanation: EBA supervisory convergence: consistent interpretation and application of CRD/CRR/LCR/NSFR across 27 member states. Reduces forum shopping and ensures comparable treatment. Achieved through binding technical standards, guidelines, and Q&A.
Question 252
The 'quantitative impact study' (QIS) conducted by Basel before finalising LCR and NSFR rules was designed to:
Select an option first.
Correct answer: A — Test whether banks could comply with proposed rules by estimating their impact on the banking sector.
Explanation: QIS: before finalising rules, Basel ran QIS exercises to assess industry-wide impact. This informed calibration of run-off rates, ASF/RSF factors, and minimum thresholds. A is correct — impact assessment to inform final calibration.
Question 253
Under the 'Basel III phase-in schedule', which liquidity ratio became binding earliest:
Select an option first.
Correct answer: B — LCR (binding from 2015 at 60%, rising to 100% by 2019).
Explanation: LCR phase-in: January 2015 at 60% minimum; rising 10% per year to 100% by January 2019. NSFR became binding January 2018 (globally). LCR was the first binding Basel III liquidity ratio. C and D are implementation dates for principles, not binding minimums.
Question 254
The 'liquidity risk appetite framework' review by the board should occur:
Select an option first.
Correct answer: B — At least annually and whenever there is a material change in the bank's business model, risk profile, regulatory requirements, or market conditions that could affect the appropriateness of the existing appetite.
Explanation: Risk appetite framework review: minimum annual review + event-triggered reviews. Material triggers: new product lines, acquisitions, regulatory changes, significant market structure changes.
Question 255
The 'G-SIB methodology' for assessing systemic importance uses which categories of indicators?
Select an option first.
Correct answer: B — Size, interconnectedness, cross-jurisdictional activity, substitutability/financial infrastructure, and complexity — each equally weighted in the overall G-SIB score.
Explanation: G-SIB indicators (FSB/BCBS): 5 categories equally weighted at 20% each: (1) size, (2) interconnectedness, (3) cross-jurisdictional activity, (4) substitutability, (5) complexity. Banks above the threshold receive G-SIB surcharges.
Question 256
The 'liquidity horizon' used in the NSFR (1 year) was specifically chosen because:
Select an option first.
Correct answer: B — A 1-year horizon gives banks enough time to implement structural changes to their funding profile if they begin to show signs of deterioration — longer than the 30-day LCR emergency buffer.
Explanation: NSFR 1-year rationale: structural funding stability requires time to change. A 1-year horizon provides a meaningful planning period — long enough to identify and address structural vulnerabilities before they become acute crises.
Question 257
The concept of 'pre-emptive recapitalisation' in the recovery planning context means:
Select an option first.
Correct answer: B — The bank raises capital or reduces risk-weighted assets at an early stage of stress — before triggers force action — to restore confidence and prevent deterioration from escalating into a full crisis.
Explanation: Pre-emptive recapitalisation: acting early (at the first signs of stress, triggered by recovery indicators) is far more effective and less costly than waiting for the crisis to deepen. The earlier the action, the more options remain available.
Question 258
The 'supervisory early intervention' powers under BRRD enable supervisors to take action when:
Select an option first.
Correct answer: B — A bank is in the early stages of deterioration — breaching risk appetite limits, capital buffers, or recovery indicators — to require corrective action before the situation becomes irreversible.
Explanation: BRRD early intervention: supervisors can require: management changes, restructuring plans, recovery plan updates, restrictions on distributions, and strategic divestments — triggered by early signs of stress before default.
Question 259
The 'national discretion' available to EU member states in implementing the LCR includes:
Select an option first.
Correct answer: B — Limited discretions explicitly provided in CRR2 — such as intragroup liquidity waiver conditions, treatment of IPS members, and certain definitions — but the core LCR framework is harmonised across the EU.
Explanation: National discretions in EU LCR: limited to explicit CRR2 provisions. The EU harmonised LCR through a binding regulation (directly applicable) rather than a directive, limiting national variation.
Question 260
The 'resolution college' for a cross-border bank ensures:
Select an option first.
Correct answer: B — Home and host resolution authorities from all material jurisdictions jointly plan and, if needed, coordinate the execution of the resolution strategy — sharing information and making joint resolution decisions.
Explanation: Resolution college: joint planning body for cross-border resolutions. In resolution: home resolution authority leads, host authorities cooperate. Prevents unilateral ring-fencing that would undermine the group-wide strategy.
Question 261
The 'liquidity risk implications of central clearing mandates' (EMIR, Dodd-Frank) mean:
Select an option first.
Correct answer: B — Banks clearing derivatives centrally must post significant initial and variation margin to CCPs — creating ongoing, potentially large liquidity demands that must be incorporated into liquidity planning and stress scenarios.
Explanation: CCP margin calls: mandatory central clearing → large margin requirements (initial + daily variation). In stress, VM calls can be very large very quickly. Banks must hold sufficient HQLA to meet them. This is a key liquidity risk from EMIR implementation.
Question 262
The 'financial conglomerate' (bancassurance group) liquidity risk has additional complexity because:
Select an option first.
Correct answer: B — Different entities in the group (bank, insurer) have different regulatory liquidity frameworks, funding sources, and asset liquidity profiles — requiring group-level coordination of liquidity management across regulatory boundaries.
Explanation: Financial conglomerate liquidity: bank (LCR/NSFR) vs insurer (Solvency II matching adjustment) vs pension fund — different regulatory frameworks, different liquid asset definitions, different stress scenarios. Group liquidity requires coordination across all.
Question 263
The 'annual reports on banks' liquidity positions' published by national supervisors and the EBA serve to:
Select an option first.
Correct answer: B — Enable public accountability and market discipline by showing aggregate trends in bank liquidity, highlighting systemic vulnerabilities, and tracking the impact of regulatory reforms over time.
Explanation: EBA aggregate liquidity reporting: published reports on EU banking sector LCR, NSFR, funding structures, and HQLA trends. Enables market participants, researchers, and policymakers to track systemic liquidity health.
Question 264
The concept of a 'liquidity stress test calibrated to the bank's own business model' means:
Select an option first.
Correct answer: B — Designing scenarios that specifically stress the bank's identified vulnerabilities — e.g., for a bank heavily reliant on covered bond funding, the scenario should include a covered bond market disruption.
Explanation: Business model calibration: each bank has unique vulnerabilities. A bank reliant on covered bonds needs a covered bond market stress. A bank with prime brokerage needs a hedge fund withdrawal scenario. The scenario must be institution-specific to test real vulnerabilities.
Question 265
The 'supervisory expectations' for a bank's liquidity risk culture include which of the following as a key indicator of a healthy culture?
Select an option first.
Correct answer: B — Liquidity risk concerns raised by the risk function are taken seriously, acted upon promptly, and do not result in retaliation against those who raise them — reflecting genuine board and management commitment to prudent liquidity management.
Explanation: Healthy liquidity risk culture indicators: (1) risk concerns are heard and acted upon (psychological safety); (2) risk management is not subordinated to commercial pressures; (3) board and senior management visibly support prudent liquidity standards; (4) breaches are escalated and remediated formally. A, C, D all describe poor culture.
Question 266
Asset-Liability Management (ALM) primarily aims to:
Select an option first.
Correct answer: B — Manage the balance sheet to optimise the risk-return tradeoff from interest rate, liquidity, and foreign exchange risks arising from maturity and repricing mismatches.
Explanation: ALM = strategic management of banking book risks: IRRBB, funding/liquidity risk, structural FX risk.
Question 267
Net Interest Income (NII) is calculated as:
Select an option first.
Correct answer: B — Total interest earned on assets minus total interest paid on liabilities.
Explanation: NII = Interest income − Interest expense. The core profitability measure for commercial banks.
Question 268
A bank has a 'positive repricing gap' at the 1-year horizon meaning:
Select an option first.
Correct answer: A — More assets reprice within 1 year than liabilities.
Explanation: Positive gap = RSA > RSL. Rising rates → NII increases (assets reprice up faster than liabilities).
Question 269
'Net Interest Margin' (NIM) is defined as:
Select an option first.
Correct answer: B — NII divided by average earning assets — measures efficiency of the bank's core intermediation.
Explanation: NIM = NII / Average Earning Assets. Higher NIM = more profitable intermediation.
Question 270
'Duration gap' analysis measures:
Select an option first.
Correct answer: B — The difference between the weighted average duration of assets and of liabilities — indicating EVE sensitivity to interest rate changes.
Explanation: Duration gap = D_A − (L/A)×D_L. Positive gap → rising rates reduce EVE.
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