Module: | MODULE B: RISK MANAGEMENT
Q459: Consider the following comprehensive statements regarding the overarching principles of liquidity risk management in commercial banks:
1. Effective liquidity management requires a dual approach: maintaining a robust stock of unencumbered liquid assets for short-term survival, and structuring a stable maturity profile for long-term resilience.
2. The Board of Directors executes the daily cash flow management and deposit pricing, while the Asset-Liability Management Committee strictly focuses on long-term risk tolerance approvals.
3. Robust stress testing models must incorporate extreme scenarios, including simultaneous retail deposit runs and massive wholesale market funding freezes.
Which of the statements given above is/are correct?
2. The Board of Directors executes the daily cash flow management and deposit pricing, while the Asset-Liability Management Committee strictly focuses on long-term risk tolerance approvals.
3. Robust stress testing models must incorporate extreme scenarios, including simultaneous retail deposit runs and massive wholesale market funding freezes.
Which of the statements given above is/are correct?
✅ Correct Answer: C
The correct answer is C. Statement 1 is correct: This defines the core Basel III paradigm.
Banks must deploy a dual strategy: managing immediate acute shocks via the Stock Approach (holding unencumbered HQLA to cover 30-day LCR outflows) and managing long-term structural viability via the Flow Approach (aligning asset-liability maturity profiles to satisfy the 1-year NSFR). Statement 2 is incorrect: This statement completely reverses the governance roles.
The Board of Directors exclusively sets the high-level risk tolerance limits and broad strategy.
They do not execute daily cash management.
The Asset-Liability Management Committee (ALCO) is the tactical executive body responsible for daily cash flows, deposit pricing, and operational execution.
Statement 3 is correct: A best-practice stress testing framework must be brutal and comprehensive.
It must evaluate severe "combined scenarios," dynamically modeling the simultaneous impact of a massive retail deposit run off alongside an absolute freeze in inter-bank wholesale funding markets.
Banks must deploy a dual strategy: managing immediate acute shocks via the Stock Approach (holding unencumbered HQLA to cover 30-day LCR outflows) and managing long-term structural viability via the Flow Approach (aligning asset-liability maturity profiles to satisfy the 1-year NSFR). Statement 2 is incorrect: This statement completely reverses the governance roles.
The Board of Directors exclusively sets the high-level risk tolerance limits and broad strategy.
They do not execute daily cash management.
The Asset-Liability Management Committee (ALCO) is the tactical executive body responsible for daily cash flows, deposit pricing, and operational execution.
Statement 3 is correct: A best-practice stress testing framework must be brutal and comprehensive.
It must evaluate severe "combined scenarios," dynamically modeling the simultaneous impact of a massive retail deposit run off alongside an absolute freeze in inter-bank wholesale funding markets.