Module: | MODULE B: RISK MANAGEMENT
Q465: Consider the following statements regarding the Contractual Maturity Mismatch monitoring tool under the Basel III liquidity framework:
1. It identifies the gaps between a bank's contractual cash inflows and outflows within defined time bands, highlighting its reliance on maturity transformation.
2. The tool strictly dictates minimum liquidity limits for each time band that banks must maintain at all times to avoid regulatory penalties.
3. The analysis provides early warning signals regarding potential liquidity shortfalls during specific future periods.
Which of the statements given above is/are correct?
2. The tool strictly dictates minimum liquidity limits for each time band that banks must maintain at all times to avoid regulatory penalties.
3. The analysis provides early warning signals regarding potential liquidity shortfalls during specific future periods.
Which of the statements given above is/are correct?
✅ Correct Answer: B
The correct answer is B. Statement 1 is correct: The Contractual Maturity Mismatch tool specifically identifies the gaps between contractual cash inflows and outflows across defined time bands.
This analysis highlights the extent to which a bank relies on maturity transformation, which is borrowing short and lending long.
Statement 2 is incorrect: This is strictly a monitoring tool, not a quantitative standard.
Unlike the Liquidity Coverage Ratio (LCR), it does not dictate minimum regulatory limits or thresholds for time bands that attract penalties if breached.
Statement 3 is correct: By tracking these maturity gaps, regulators and internal management receive critical early warning signals about potential liquidity shortfalls that might occur in specific future periods, allowing for proactive risk mitigation.
This analysis highlights the extent to which a bank relies on maturity transformation, which is borrowing short and lending long.
Statement 2 is incorrect: This is strictly a monitoring tool, not a quantitative standard.
Unlike the Liquidity Coverage Ratio (LCR), it does not dictate minimum regulatory limits or thresholds for time bands that attract penalties if breached.
Statement 3 is correct: By tracking these maturity gaps, regulators and internal management receive critical early warning signals about potential liquidity shortfalls that might occur in specific future periods, allowing for proactive risk mitigation.