LIQUIDITY RISK MANAGEMENT
Chapter notes, video classes, MCQ practice tests and quick-revision one-liners for Risk Management (Elective) — CAIIB.
One-liners from this chapter
Free sample — 8 of 66 rapid-fire Q&A cards.
What is liquidity risk in the context of banking?
Liquidity risk is the risk that a bank cannot meet its financial obligations as they fall due without incurring unacceptable losses, arising from mismatches between asset maturities and liability maturities.
What is the primary objective of liquidity risk management in banks?
Ensure bank can meet all payment obligations on time without distress.
What are the two main types of liquidity risk faced by banks?
The two main types are funding liquidity risk (inability to raise funds to meet obligations) and market liquidity risk (inability to liquidate assets quickly without significant price concession).
What is a liquidity buffer and why do banks maintain it?
Reserve of liquid assets held to absorb sudden liquidity shocks.
What is the Liquidity Coverage Ratio (LCR) as prescribed by Basel III?
LCR requires banks to hold a sufficient stock of high-quality liquid assets (HQLA) to cover total net cash outflows over a 30-day stress period, with a minimum ratio of 100%.
What is funding liquidity risk?
Risk that bank cannot raise funds to meet financial obligations when due.
What is the Net Stable Funding Ratio (NSFR) under Basel III?
NSFR requires banks to maintain a stable funding profile in relation to their assets and off-balance-sheet activities over a one-year horizon, with available stable funding divided by required stable funding to be at least 100%.
What is market liquidity risk in banking?
Risk that bank cannot sell assets quickly without significant price discount.
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