Module: | MODULE B: RISK MANAGEMENT
Q430: Scenario: Alpha Bank expects ₹500 crore in loan repayments from major corporate clients on March 15 to fund an equivalent amount of maturing wholesale deposits. However, the corporate borrowers default on their payments on that exact day. Based on liquidity risk principles, consider the following statements regarding the risk profile and correct regulatory actions:
1. The bank is facing severe Time Risk because the non-receipt of expected cash inflows forces it to find alternative, high-cost funding.
2. To manage this sudden shortfall, the Asset-Liability Management Committee must utilize the structural liquidity buffer or raise emergency short-term wholesale funds.
3. This scenario perfectly illustrates Market Liquidity Risk, as the bank is unable to sell its corporate loan portfolio in the open market.
Which of the statements given above is/are correct?
2. To manage this sudden shortfall, the Asset-Liability Management Committee must utilize the structural liquidity buffer or raise emergency short-term wholesale funds.
3. This scenario perfectly illustrates Market Liquidity Risk, as the bank is unable to sell its corporate loan portfolio in the open market.
Which of the statements given above is/are correct?
✅ Correct Answer: A
The correct answer is A. Statement 1 is correct: Time Risk is explicitly defined as the risk arising from the need to compensate for the non-receipt of expected inflows of funds.
When Alpha Bank's corporate clients defaulted on the ₹500 crore repayment, the bank instantly faced Time Risk, forcing it to seek alternative funding to honor its maturing deposits.
Statement 2 is correct: The Asset-Liability Management Committee (ALCO) is the tactical execution body.
In a crisis, ALCO is responsible for tapping into the bank's structural liquidity buffer or entering the wholesale market to raise emergency short-term funds to bridge the ₹500 crore gap.
Statement 3 is incorrect: This scenario does not illustrate Market Liquidity Risk.
Market Liquidity Risk refers to the inability to easily liquidate or offset a specific asset position (like bonds or securities) without taking a massive discount due to inadequate market depth.
The failure to receive loan installments is strictly Time Risk.
When Alpha Bank's corporate clients defaulted on the ₹500 crore repayment, the bank instantly faced Time Risk, forcing it to seek alternative funding to honor its maturing deposits.
Statement 2 is correct: The Asset-Liability Management Committee (ALCO) is the tactical execution body.
In a crisis, ALCO is responsible for tapping into the bank's structural liquidity buffer or entering the wholesale market to raise emergency short-term funds to bridge the ₹500 crore gap.
Statement 3 is incorrect: This scenario does not illustrate Market Liquidity Risk.
Market Liquidity Risk refers to the inability to easily liquidate or offset a specific asset position (like bonds or securities) without taking a massive discount due to inadequate market depth.
The failure to receive loan installments is strictly Time Risk.