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, and, in extreme cases, insolvency or bankruptcy. Therefore, managing funding liquidity risk is crucial for the survival and success of any financial institution.
Choice B is incorrect. This choice 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 is incorrect. While this statement does relate to liquidity management strategies, it does not define funding liquidity risk.
Choice D is incorrect. This defines model risk, which is the risk of loss resulting from the use of insufficiently accurate models to make decisions when valuing financial securities.
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Q.5329 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?
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.
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