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Explanation:
According to regulatory best practices, a bank's contingency funding plan (CFP) should be closely aligned with its liquidity stress testing framework. The stress scenarios used in the CFP should be consistent with those in liquidity stress tests as well as other enterprise-wide frameworks like recovery and resolution plans (RRP). Option A is incorrect because stress testing scenarios should address both institution-specific and market-wide (systemic) risks. Option C is incorrect because the primary objective of contingent actions during stress is to ensure survival and meet cash outflows (e.g., liquidating assets, stopping reinvestments), not to maximize profitability. Option D is incorrect because the CFP is typically invoked based on predefined early warning indicators (EWIs) and specific trigger events through a formalized governance process, rather than a general review by a team.
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.
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