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Answer: Institutions should align their CFP stress scenarios to those in its liquidity stress testing framework, as well as to other frameworks such as recovery and resolution plans.
The correct statement regarding the key components to be found in an effective contingency funding plan (CFP) is option B. This is because an institution's CFP should be aligned with its liquidity stress testing framework and also take into account other frameworks such as recovery and resolution plans. This alignment ensures a comprehensive approach to managing liquidity risks under various stress scenarios. Option A is incorrect because liquidity stress testing scenarios should not only focus on institution-specific risks but also consider systemic risks that could impact the broader financial system. Option C is incorrect as contingent actions should include measures to increase bank liquidity, such as rolling off maturing investments, rather than maintaining investment strategies to maximize profitability during stressed periods. Option D is incorrect because it is the treasurer, in consultation with the CFO, who may invoke the CFP, not the liquidity crisis team. The key components of a contingency funding plan include governance and oversight, scenarios and liquidity gap analysis, contingent actions, monitoring and escalation, and data and reporting. These components are essential for a bank to effectively manage and mitigate liquidity risks.
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A Chief Financial Officer (CFO) is interested in assessing the robustness of the financial institution's backup funding strategy to ensure it includes all necessary components. Which statement most accurately identifies the critical elements that should be incorporated in an effective contingency funding plan (CFP)?
A
Liquidity stress testing scenarios are designed to focus solely on institution-specific risks and address both market (asset) liquidity and funding liquidity, over short-term and prolonged stress periods.
B
Institutions should align their CFP stress scenarios to those in its liquidity stress testing framework, as well as to other frameworks such as recovery and resolution plans.
C
Identification of contingent actions such as maintaining investment strategies to reinvest maturing securities in order to maximize and maintain bank profitability during stressed periods.
D
The liquidity crisis team may invoke the CFP based on a review of the markets, industry, bank-specific conditions, and liquidity stress testing results.