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Learning objectives: Differentiate between various types of liquidity, including funding, operational, strategic, contingent and restricted liquidity. Estimate contingent liquidity via the liquid asset buffer. Discuss liquidity stress test design issues such as scope, scenario development, assumptions, outputs, governance and integration with other risk models.


20.10.1. Which of the following types of liquidity is available in the form of the institution's liquidity asset buffer (LAB) and represents liquidity available to meet general financial obligations under a stress scenario?

a. Operational
b. Strategic
c. Contingent
d. Restricted

20.10.2. Acme Bank has a normal liquidity asset buffer (LAB) of $60.0 million. For the purpose of estimating its contingent liquidity, the bank conducts simulated stress scenarios. The first set of stress scenarios are called "stressed outflows" and represent a mixture of contractual and contingent outflows (a relative mix of 60% contractual and 40% contingent) and its categories include retail deposit outflows, unsecured wholesale funding outflows, secured funding runoff, and the potential drawdown of credit and liquidity facilities. This first stress scenario produces a net estimate of $28.0 million. The second set of stress scenarios are called "stressed inflows" and includes include secured funding transaction maturities, loan repayments from customers, and drawdowns on liquidity facilities available to Acme Bank. This second stress scenario produces a net estimate of $15.0 million. Finally, Acme holds $16.0 million of operational liquidity.

What is the bank's estimate of contingent liquidity; aka, stressed liquidity asset buffer?

a. $32.0 million
b. $47.0 million
c. $57.0 million
d. $103.0 million

20.10.3. In regard to the design of liquidity stress test(s), each of the following is true EXCEPT which is inaccurate?

a. The primary outcome metric of the liquidity stress test is the level of available liquidity relative to net cash outflows under each scenario.
b. Three general approaches to performing a liquidity stress test are historical statistical techniques, deterministic models, and Monte Carlo simulation
c. Liquidity optimization refers to an algorithm that identifies the single solution for the theoretically largest possible liquidity buffer (versus all other possible portfolio alternatives)
d. A reverse liquidity stress test imagines the bank's liquidity failure (aka, destruction scenario, unviable business plan) and induces the conditions or scenarios that might enable such a failure

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