Financial Risk Manager Part 1
Get started today
Ultimate access to all questions.
During a company's annual general meeting, a shareholder asks the Chief Risk Officer to elaborate on what she meant by funding liquidity risk. Which of the following definitions given by the Chief Risk Officer is correct?
Other
Community
TTanishq
A
It is the possibility that a bank could find itself unable to settle obligations as soon as they are due.
B
It is the danger that a change in rates will cause the value of assets to decline and that of liabilities to increase.
C
It is the aim to ensure that banks have liquidity and funding strategies that will survive system-wide stress scenarios.
D
It is the risk of loss resulting from the use of insufficiently accurate models to make decisions when valuing financial securities.
Explanation:
Explanation
Funding liquidity risk is indeed the possibility that a bank or any financial institution could find itself unable to settle obligations as soon as they are due. This risk arises when a company is unable to meet its short-term financial obligations due to insufficient cash, cash equivalents, or limited access to funding sources. This inability to settle obligations on time can have severe consequences, including:
- Reputational damage
- Loss of confidence from customers and investors
- Increased borrowing costs
- In extreme cases, insolvency or bankruptcy
Therefore, managing funding liquidity risk is crucial for the survival and success of any financial institution.
Why other options are incorrect:
Choice B describes interest rate risk, not funding liquidity risk. Interest rate risk refers to the potential for investment losses due to a change in interest rates, not the inability to meet obligations as they come due.
Choice C relates to liquidity management strategies but does not define funding liquidity risk accurately. It describes the objective of liquidity management rather than the risk itself.
Choice D describes model risk, which is the risk of loss resulting from the use of insufficiently accurate models to make decisions when valuing financial securities or making investment decisions.
Comments
Loading comments...