Liquidity and Treasury Risk Measurement and Management

• Topic 01

  Liquidity Risk Fundamentals

  45 questions
• Topic 02

  Liquidity Coverage Ratio (LCR)

  45 questions
• Topic 03

  Net Stable Funding Ratio (NSFR)

  45 questions
• Topic 04

  Intraday Liquidity Management

  45 questions
• Topic 05

  Funds Transfer Pricing (FTP)

  45 questions
• Topic 06

  Contingency Funding Plans

  45 questions
• Topic 07

  Asset-Liability Management (ALM)

  45 questions
• Topic 08

  Central Bank Liquidity Facilities

  45 questions

A few questions from this unit, with the answer and a full explanation. The complete bank is available when you start practising.

1. A bank has: Tier 1 capital $100M; 3-year senior bonds $200M; stable retail deposits $800M; non-operational wholesale corporate deposits (6 months) $400M; 3-month interbank borrowing $500M; Level 1 HQLA $200M; residential mortgages (>= 1yr, RW 25%) $900M; corporate loans (>= 1yr, RW <= 35%) $400M; short-term financial institution loans (< 6 months) $100M. Calculate the NSFR.

   • A
     ASF: Tier 1: $100M. Senior bonds: $200M. Stable retail: $800M x 95% = $760M. Wholesale corporate: $400M x 50% = $200M. Interbank: $500M x 0% = $0M. Total ASF = $1,260M. RSF: Level 1 HQLA: $200M x 5% = $10M. Mortgages (low RW): $900M x 65% = $585M. Corp loans: $400M x 65% = $260M. FI loans (< 6m): $100M x 10% = $10M. Total RSF = $865M. NSFR = $1,260M / $865M = 145.7%. PASS.
     Correct answer
   • B
     ASF = $1,260M. RSF: Level 1: $200M x 5% = $10M. Mortgages (RW 25%): $900M x 85% = $765M (applying the 85% RSF for mortgages with RW above 35%). Corp loans: $400M x 65% = $260M. FI loans (< 6m): $100M x 10% = $10M. Total RSF = $1,045M. NSFR = $1,260M / $1,045M = 120.6%.
   • C
     ASF: $100M + $200M + $800M x 95% + $400M x 50% + $500M x 0% = $1,260M. RSF: Level 1 0% = $0M; mortgages 85% = $765M; corp loans 85% = $340M; FI loans 10% = $10M. Total RSF = $1,115M. NSFR = $1,260M/$1,115M = 113%.
   • D
     ASF: Total = $100M + $200M + $800M + $400M + $500M = $2,000M. RSF: Total = $200M + $900M + $400M + $100M = $1,600M. NSFR = $2,000M / $1,600M = 125%.
   Explanation

   ASF calculation: Tier 1 capital: $100M x 100% = $100M. 3-year senior bonds (maturity >= 1 year): $200M x 100% = $200M. Stable retail deposits (< 1 year): $800M x 95% = $760M. Non-operational wholesale corporate deposits (6 months, < 1 year): $400M x 50% = $200M. 3-month interbank borrowing (FI, < 6 months): $500M x 0% = $0M. Total ASF = $100M + $200M + $760M + $200M + $0M = $1,260M. RSF calculation: Level 1 HQLA (unencumbered): $200M x 5% = $10M. Residential mortgages (>= 1 year, RW = 25% <= 35%): $900M x 65% = $585M. Corporate loans (>= 1 year, RW <= 35%): $400M x 65% = $260M. Short-term loans to financial institutions (< 6 months): $100M x 10% = $10M. Total RSF = $10M + $585M + $260M + $10M = $865M. NSFR = $1,260M / $865M = 145.7%. The bank comfortably passes. Key: interbank borrowing (< 6 months) = 0% ASF; FI loans (< 6 months) = 10% RSF; Level 1 HQLA = 5% RSF (not 0%); corporate loans with RW <= 35% = 65% RSF (not 85%).

2. Do central bank reserves count as Level 1 HQLA under the Basel III LCR framework?

   • A
     No, only government bonds count as Level 1 HQLA — central bank reserves are treated separately
   • B
     Yes, central bank reserves count as Level 1 HQLA with a 0% haircut and no composition cap
     Correct answer
   • C
     Yes, but subject to the 40% Level 2 cap along with sovereign bonds
   • D
     No, central bank reserves are excluded from HQLA because they are not marketable securities
   Explanation

   Central bank reserves (balances held at the central bank) are classified as Level 1 HQLA with a 0% haircut and are not subject to any composition cap. They are the most liquid asset possible — essentially cash at the central bank. This means banks can include their full central bank reserve balance in the LCR numerator without any adjustment. However, a key distinction: pre-arranged central bank credit facilities (undrawn commitments) do NOT count as HQLA — only actual reserve balances held are eligible.

3. How does quantitative easing (QE) affect bank reserves held at the central bank?

   • A
     QE decreases reserves because the central bank uses existing reserves to purchase securities in the open market
   • B
     QE increases reserves, but only those held by the primary dealers, not by commercial banking institutions
   • C
     QE decreases bank reserves by moving funds from reserve accounts into government securities portfolios
   • D
     QE increases bank reserves: when the central bank buys securities from banks (or their customers), it credits the seller's bank account at the central bank, expanding excess reserves
     Correct answer
   Explanation

   In a QE operation, the central bank purchases bonds (government securities or other assets) from the private sector. The seller (a commercial bank or an asset manager) receives payment — the central bank credits the commercial bank's reserve account at the central bank. This directly increases bank reserves. The aggregate reserve increase is equal to the total value of securities purchased. The result: banks accumulate excess reserves, their Level 1 HQLA balances rise, and long-term bond yields fall (prices rise) as the central bank removes supply from the market. Quantitative tightening (QT) reverses this by draining reserves.