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P2.T8.20.11. Liquidity Risk Reporting and Stress Testing (Choudhry)

Nicole Seaman

Director of FRM Operations
Staff member
Learning objectives: Identify best practices for the reporting of a bank’s liquidity position. Compare and interpret different types of liquidity risk reports. Explain the process of reporting a liquidity stress test and interpret a liquidity stress test report.


20.11.1. The staff at Umbrella Street Bank, which is a commercial bank (it could also be a savings institution or credit union), produces several liquidity risk reports on a daily, weekly, monthly, and quarterly basis. Among these liquidity risk reports is a deposit tracker report. Among the following metrics, which is MOST LIKELY to appear in their deposit tracker report?

a. Loan-to-deposit (LTD) ratio (current and forecast) versus board-approved lower floor (limit) of 120.0%
b. Loan-to-deposit (LTD) ratio (current and forecast) versus board-approved upper ceiling (limit) of 80.0%
c. Market-to-book ratio of common equity (current and forecast) versus investor-communicated target of 1.30
d. The leverage-adjusted duration gap (current and forecast) versus board-approved upper ceiling of 3.5 years

20.11.2. In regard to the variety of types of liquidity risk reports generated by a typical bank, each of the following is a true statement EXCEPT which is inaccurate?

a. Wholesale funding reports that breakdown the bank's funding by price, volume, product type, and tenor are an indication of liquidity strength
b. Liquidity metrics should include Undrawn Commitments because the existence of undrawn commitments can exacerbate funding shortages at exactly the wrong time
c. In the liquidity coverage ratio (LCR), which is a strategic and regulatory liquidity risk metric, retail demand deposits are treated as one-year money with a run-off rate in the range of 0.28% (1/365 days) to 0.40% (1/255 days)
d. The funding concentration report matters to senior managers because a central principle of liquidity management is funding diversity: a bank should not become over-reliant on a single source, or sector, of funds.

20.11.3. Which of the following is the MOST LIKELY output of a bank's liquidity stress test report?

a. Cash flow survival horizon
b. Net interest income projection
c. Leverage ratio of unsecured debt to equity
d. Return on equity versus threshold and target

Answers here: