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Answer: Institutions should align their CFP stress scenarios to those in their liquidity stress testing framework, as well as to other frameworks such as recovery and resolution plans.
**B is correct.** An institution's CFP stress scenarios should be aligned with its liquidity stress testing frameworks, especially through its limit structure and escalation processes. In addition, the CFP should align with other key frameworks such as recovery and resolution plans. **A is incorrect.** Liquidity stress testing scenarios should also focus on systemic risks, not solely on institution-specific risks. **C is incorrect.** Contingent actions should include rolling off of maturing investments to increase bank liquidity, not maintaining investment strategies to reinvest maturing securities. **D is incorrect.** The treasurer in consultation with the CFO may invoke the CFP, not the liquidity crisis team.
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The CFO of a bank has asked for a review of the bank's contingency funding plan (CFP) and would like to ensure that key components are incorporated in alignment with best practices. Which of the following is a correct statement regarding the key components to be found in 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 their liquidity stress testing framework, as well as to other frameworks such as recovery and resolution plans.
C
Contingent actions, such as maintaining investment strategies to reinvest maturing securities, should be identified 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.