Module: | MODULE B: RISK MANAGEMENT
Q446: Scenario: Zeta Bank's Contingency Funding Plan has been activated due to a sudden market-wide liquidity freeze. The bank urgently needs to raise 2,000 crore rupees to meet its clearinghouse obligations by the end of the day. Based on sound liquidity risk principles, consider the following statements:
1. The Contingency Funding Plan must clearly identify pre-arranged emergency funding sources, such as committed inter-bank lines or central bank standing facilities.
2. To raise immediate cash, the bank can legally re-hypothecate collateral that has already been pledged to a third party.
3. The bank must utilize a predefined collateral management strategy to quickly mobilize its stock of unencumbered High Quality Liquid Assets for repo market borrowing.
Which of the statements given above is/are correct?
2. To raise immediate cash, the bank can legally re-hypothecate collateral that has already been pledged to a third party.
3. The bank must utilize a predefined collateral management strategy to quickly mobilize its stock of unencumbered High Quality Liquid Assets for repo market borrowing.
Which of the statements given above is/are correct?
✅ Correct Answer: B
The correct answer is B. Statement 1 is correct: A fundamental requirement of a Contingency Funding Plan (CFP) is the explicit mapping of reliable, pre-arranged emergency funding sources.
The ALCO cannot scramble for lenders during a crisis; they must immediately tap into established backup credit lines or central bank standing liquidity facilities (like the Marginal Standing Facility). Statement 2 is incorrect: Re-hypothecating assets that are already encumbered (pledged to a third party) is strictly illegal and violates basic collateral management principles.
To raise emergency funds, a bank can only pledge or liquidate assets that are completely unencumbered and free of any prior liens.
Statement 3 is correct: Operational readiness is critical.
The CFP must include a robust collateral management strategy that allows the treasury desk to instantaneously identify, mobilize, and pledge its unencumbered High Quality Liquid Assets (HQLA) in the repo market to generate the required 2,000 crore rupees within intraday deadlines.
The ALCO cannot scramble for lenders during a crisis; they must immediately tap into established backup credit lines or central bank standing liquidity facilities (like the Marginal Standing Facility). Statement 2 is incorrect: Re-hypothecating assets that are already encumbered (pledged to a third party) is strictly illegal and violates basic collateral management principles.
To raise emergency funds, a bank can only pledge or liquidate assets that are completely unencumbered and free of any prior liens.
Statement 3 is correct: Operational readiness is critical.
The CFP must include a robust collateral management strategy that allows the treasury desk to instantaneously identify, mobilize, and pledge its unencumbered High Quality Liquid Assets (HQLA) in the repo market to generate the required 2,000 crore rupees within intraday deadlines.