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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.
B is correct. The explanation provided in the file content states that an effective contingency funding plan (CFP) should have its stress scenarios aligned with those in the institution's liquidity stress testing framework, as well as with other frameworks such as recovery and resolution plans. This alignment ensures a comprehensive approach to managing liquidity risks under various stress conditions. Option A is incorrect because liquidity stress testing scenarios should not only focus on institution-specific risks but also consider systemic risks that could affect 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 solely to maximize profitability. Option D is incorrect because it is the treasurer, in consultation with the CFO, who may invoke the CFP, not the liquidity crisis team based on a review of various conditions and stress testing results.
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In the context of financial risk management, specifically within the framework of ensuring liquidity and ongoing operations, a Chief Financial Officer (CFO) is looking to assess the institution's backup funding strategy. The goal is to confirm that all fundamental aspects required for a robust Contingency Funding Plan (CFP) are incorporated. Which of the following statements accurately reflects the key components that should be part of an effective 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.